Level 2 Lecture


I am not an expert on level 2 but I have had some success using it as part of my trading system

I run Proquote this gives me Level 2, News, and indexes and price watcher all with streaming price updates

I also run Updata Trader this gives me trades, stock tickers, real time leaders and laggards on the stocks and charts I am interested in. and AIQ Real Time for intra-day charting.

Recent technology has allowed access to market information that was once available only to the Market Making community and to the institutional world.

First let us look at the L2 screen it is packed full of useful information being continuously updated.

Each Level II screen gives you much more information than the traditional Level 1 screens (showing Bid/Offer/Volume etc.).

The Level 1 information that most systems provide only have the bare essentials but fails to show how the prices are derived.

For an active investor/trader it is essential to have as much depth of information as possible, which is where Level 2 differs

Top left you have the segment (SETS, SEAQ, AIM)

Then you have the NMS or Normal Market Size this is calculated for each security at 2.5% of average daily turnover from the preceding year.

This is also a base for maximum size of trade before paying a premium but may vary according to supply and demand.

Under this you have the last trade showing price, time The cum vol. This is total of all buys and sells of the day and size. You also have the mid price trade hi and low of the day

VWAP or Volume weighted Average Price

This is calculated by dividing the value of trades by the volume over a given period.

A closing 10-minute VWAP is used to set closing prices on the order book.

The yellow band on a SEAQ or SETS screen, which displays the highest, bid and the lowest offered prices that competing market makers are offering in a security. They are known as the 'touch' or 'yellow strip' prices

When we click on the level 2 button we have a whole new insight to what is going on under the surface

Here you can see the total number of buy and sell orders and the prices. This gives you a good idea of the depth of the market.

How to use this to you advantage

I tend to be on the scan during the day for possible trading opportunities for my favoriote or targeted stocks.

I use L2 as a tool to back up other information before making a trade.

For instance a company issues a profits warning the share starts to fall very fast

Too late for me to short the stock so I will follow the fall using L2 to help me find the bottom.

On occasions like this you may have 10 to 1 sell /buy ratio
I would then look for the ratio of sellers to buyer to close say from 10k on buy / 100k on sell
To 20k on buy 80k on sell looking for the sellers to run out and the price to hit a point that is oversold and buyers start to come back.

This can be used on big falls or just to pick the peaks and troughs during the day

It is very important you look at the reason for the drop and evaluate why the stock has dropped.

It is a good idea to watch some stocks to get to know how they trade using L2 see how the volumes change as they go up and down and get to know their characteristics

Level 2 can also help give you an idea of support for the stock you are trading.

Say you are long on BT at 700 the stock moves up to 705 and a buy comes in of 100,000 at 703 you know that while that is there you will have good support, but watch for it being pulled as often happens.

Conversely you may have a sell order come in at 707 this could give resistance to the price going up as other sellers will undercut this price to be on the touch and get hit first.

If you a thinking of selling look to see how much the price you are selling at has support.

You may find that you have a large volume at the bid price say 700 and lots more at 799

On the other hand you may find there are only perhaps a 1000 left at 700 and the next bid is 790 then you know that you should move very quick to get the 700 while its on offer.

The buy volume and the sell volume can be misleading unless you look at it closely

The important orders are the top 5 or 6

These are the one most likely to affect the direction of the stock.

If you look down the order book you will see for instance on Glaxo mid price £20

Buy orders at £14 and Sell orders at £34.50 hardly relevant to the current price

So do a quick calculation on the top 5 orders these are the ones that matter

With Proquote you can see new orders being placed into sets with a colour code of red for the latest and blue for the previous two orders.

This will help you see what side the new orders are coming into the buy or sell side

This will also show if a MM drops a temporary order down the list in two increase the volume on one side to make us traders think the buyer are coming back. This lifts the volume only to be pulled letting the price drop very quickly

They know we all have L2 and will use it to trick us poor simple honest traders I’m sure.
Proquote also includes price watcher this will alert you to say 5 upward ticks in a row on a stock
Or percentages rise or fall of any stock

I do not have any links with Proquote but I feel they are the best L2 providers in the game at present offering a reliable and in my opion essential service to regular traders.

Good Trading MX
Learning all the time.....

thanks for all your info on L2, this sort of information is almost priceless to us newbee's.

This site just keeps getting better....!!!!
There's going to be plenty more lectures, and we've created a forum called Boot Camp, for just this purpose - to archive all the lectures given on the #trade2win-BOOT-CAMP chat room.


ps. Welcome to our site Guesty!!
Free Trial

Cheers for the useful gen, MX.

Proquote are offering 5 trading days free trial.
Looks like it's from any given Friday to the following Thursday. Will get a chance to use my trial this Monday.