Role of Lvl2 in Grey1's Strategy

[rajibde]

Grey1 has mentioned in his (previous) posts that he uses Lvl 2 as a secondary data just to confirm the absence of any big orders under his entry point (if he is going long). When I look at a Lvl2 screen I find the data moving at quite a fast pace. I am unable to find a quick way of understanding the information provided by the Lvl 2 screen with a view to apply the same for the purpose of entry confirmation in time(i.e -even if there is a big order below my entry-it changes very swiftly thereby if anything, it confuses me )

With Grey1's strategy in view can someone please elucidate as to how the Lvl 2screen can be used as a 'quick' reference before entry?

Many thanks

Raj

 

[kako]

Hi

no comment on ur main question, although grey was using levII some years ago, but not anymore. he told us this year that he eliminated LevII from entry conformation process, and not looking @ it anymore, so u could do the same thing i guess.
the reason he's reluctant to use it anymore(from my memory) is recent computer tech. deployed in LevII screens, also sophisticated methods MM use to hide their intentions, make it much harder than before, to use Lev II in a profitable way.

Regards
...................................
Kako

 

[rajibde]

Hi

no comment on ur main question, although grey was using levII some years ago, but not anymore. he told us this year that he eliminated LevII from entry conformation process, and not looking @ it anymore, so u could do the same thing i guess.
the reason he's reluctant to use it anymore(from my memory) is recent computer tech. deployed in LevII screens, also sophisticated methods MM use to hide their intentions, make it much harder than before, to use Lev II in a profitable way.

Regards
...................................
Kako

Hi Kako,

Thanks for your reply. is it safe to assume that Lvl2 utility therefore is negligible ? I quite agree that the MMs go to quite an extent to hide their intentions and therefore a large order below an entry point for going long may mean just the opposite to what a lvl2 screen conveys.

Any other opinions are welcome.

Raj

 

[Trader333]

Level II is of use primarily as a risk reduction factor at trade entry but as others have said it is not necessary to be profitable and not all MM try and disguise their actions.


Paul

 

[rajibde]

Thanks Kako and Paul for your opinions.

Cheers!

Raj

 

[belflan]

Level II is of use primarily as a risk reduction factor at trade entry but as others have said it is not necessary to be profitable and not all MM try and disguise their actions.


Paul

hi Paul,

this post is from a while back,

I'm trying to gain an understanding of level 2 (out of interest more than any thing else)

did you mean that MM's in some stocks do not disgure their actions? do you still hold this view? if you do, which stocks do you think Level two can be used on as a tool successfully?

thanks
glen

 

[Trader333]

Glen,

It is quite a while since I used Level II and what I was saying was that some MM are just not concerned with trying to mislead people with their quotes. This is not stock specific but more to do with particular MM. Now things may have changed but you could get the following scenario:

If GSCO was sitting just below the inside Bid with a size of 500 then the implication is that he wants to buy a lot of stock and as such the stock should (in theory rise in price). However, GSCO is well known for faking and may well be selling via an ECN in smaller lots but elsewhere the issue being that you just don't know and the only real indication would be to look at the time and sales data.

Now if NITE was doing the same I would have been less concerned because NITE is not known for faking at least there weren't a few years ago.

The value of Level II has diminished so much that it is of little use nowdays in my view even though people are still making out that you can make a fortune using it.


Paul

 

[belflan]

Glen,

It is quite a while since I used Level II and what I was saying was that some MM are just not concerned with trying to mislead people with their quotes. This is not stock specific but more to do with particular MM. Now things may have changed but you could get the following scenario:

If GSCO was sitting just below the inside Bid with a size of 500 then the implication is that he wants to buy a lot of stock and as such the stock should (in theory rise in price). However, GSCO is well known for faking and may well be selling via an ECN in smaller lots but elsewhere the issue being that you just don't know and the only real indication would be to look at the time and sales data.

Now if NITE was doing the same I would have been less concerned because NITE is not known for faking at least there weren't a few years ago.

The value of Level II has diminished so much that it is of little use nowdays in my view even though people are still making out that you can make a fortune using it.


Paul

thanks Paul,

very informative, I've got an IB account, do they offer L2 for free on US stocks (if they don't I think I'll just forget about it)

I'd quite like to watch it for a while, while trading, just out of interest before completely dismissing it (which i think i'm likely to do)

thanks
Glen

 

[Trader333]

IB charge $15 per month for Level II


Paul

 

[Grey1]

Any 1 told you he gains advantage by using L2 tell them to come to a chat room to show you how LIVE,, L2 was a good tool before decimalization and not any more,

On top of all that various third party algorithms have been designed to fake moves to get L2 traders into the trade that they would NOT other wise getinto it.

I suggest to spend much time on learning where OVER ALL MARKET is heading and this will make a huge difference in your winnings. It is not easy to guage the direction but you donot have to be right every time as long as you are correct most of the time.

USe multi time frame concept using 10 min MACCI or for further confirmation use 30 min and you are technically trading at optimum that a trader technically should .

Remember, IT IS NOT AN EASY TASK to know the market direction but you have to accept this as fact and try to predict or if you like get a correct analysis MOST of the times.

Today was a good example,,, when market gapped up 10 min got OB immediatley and technically you should have been short.. Not a difficult day.

STOP LOOKING FOR THE GRAIL... UNDERSTAND THAT THIS IS THE GAME OF ODDS AND YOU WILL BEAT THE MARKET IN A LONG TERM IF YOU JUST STICK TO WHAT YOU GOT

Grey1

 

[Grey1]

The value of Level II has diminished so much that it is of little use nowdays in my view even though people are still making out that you can make a fortune using it.


Paul

Paul is spot on ,, dodgy coaches with no qualifications except MAN made or self given doctrine insist on seeing things others cannot see to rip off other traders and charge them for coaching . Be aware

Few years ago this guy came to the BB and called him self L2 expert and slagged charts and chartist,,, His posts are still on this bb and the same guy all of a sudden became a TA expert and now charging people to teach TA. Ridiculous but it is true.

There are still guys around who sit there hours and hours to ANALYSE MM's activities and miss the bigger picture which is WHERE THE HELL MARKET IS GOING AND WHY ON EARTH AM I SHORT WHEN MARKET IS STRONG .

use your head... don't jump from one strategy to another.



Grey1

 

[belflan]

STOP LOOKING FOR THE GRAIL...

hi Grey1,

good to here from you. (hope your well)

I'm not looking for any grail, and i work to hard for my money to give it away to any vendors

just trying to build up some back ground knowledge

get well (or stay well) soon

thanks
glen

 

[Sirlosealot]

Hi Glen

A couple of years ago I researched level 2 and drew a definite blank - for me anyway. I’m not sure how research you’ve done on Level 2 but if its not much, this might help. On the other hand, I’m no expert and if anyone thinks I’m talking rubbish fell free to correct me. These are just my thoughts and conclusions and I’d welcome more info on Level 2.

When I looked into Level 2 there was a whole lot of info at that time regarding "following the Ax", reading the depth of the market, being able to judge when support was evaporating or arriving etc etc. And as Iraj says, there are no shortage of coaches more than willing to show you how easy it is to crack this type of trading - for a hefty fee - but of course for a fee that is just a drop in the ocean when compared to the riches which will come your way after you have signed up and if you are not prepared to part with a mere £1,000 or two to get the very best of advice how serious can you really be!! We are given numerous examples of trade set ups showing spectacular results using sure bet set ups.

But somehow non of these experts risk their reputation by live trading - not even for a short time. All sorts of excuses are given and you are made to feel you are calling their integrity into question if you want proof of their practical trading success before parting with you hard earned cash.

Here’s a screen shot of my esignal Depth of Market screens for RIMM for part of today.

You can see at the bottom of each window how many different “Depth of Market” screens - there are - Level 2, Total View, Regional, SingleBook, Arca etc etc. Take the middle window marked as Level 2 by the green light on the bottom left.

The 5th row to the right shows chxe has been at the inside bid 52 times since I opened up the screen. cinn has been at the inside 13,480 times. The problem is that all the lower case MMIDs are ECNs rather than Market Makers. MSCO and TMBER and FBRC are the only Market Makers who have been on the inside bid and only 11 times out of 26,000!! I’m a bit out of date but when I researched level 2, NASDAQ had set up a MMID symbol named “SIZE” which was where Market Makers could hide their orders anonymously. All you would see in Level 2 was SIZE and not who the market maker was. I think this must have changed to NSDQ – perhaps someone could confirm this.

So where’s the Ax. Its quite plain that all the MMs are using ECNs or NASQ to hide their identity and for this stock at this time there is no visible Ax. I don’t see why there ever would be now, since hiding your intentions is so easy for any MM.

So you cant use Level 2 to find out who’s buying and selling. So what about the real depth of the market. Unfortunately anyone can hide their order so when cinn shows 400 on the inside Ask it might be that Morgan Stanley (MSCO I think) has a further 10,000 hidden through cinn at that price and that if you were to look at the deals going through you would see trade after trade going through the ask at 118.76 and the Level 2 still showing cinn standing at 4. There is now way you can judge when cinn’s supply at 118.76 is going to run out and the price moves on to arca at 118.76 (who might also have a further 10,000 placed by Morgan Stanely but hidden!!- who knows).

Also you can see that arcx has 500 sitting at 118.73 on the bid. But if you look at the right hand window which gives all arcx orders, you can see that it also has 600 at 118.72 and 300 at 118.71. These bids which are off the best bid for this ECN are not shown on the Level 2 screen. The same applies to all the other ECNs which have their own order books and depth of market. Only the best bid and ask are shown on the level 2 screen. So to get a true depth even without worrying about “hidden” quotes you would need to combine all the Level 2 quotes with all the ECN quotes. Given the huge traffic now going through the ECN books I think this truncating of the depth must surely have a devastating effect on trying to trade using “Depth of Market” as a guide.

NASDAQ in their wisdom also acknowledge that Level 2 is pretty useless for judging the true depth of the market so they brought out “Total View”. Total View is supposed to show the true depth. I’ve never really worked out just what it does. Sure, it shows the added “visible”quotes by NSDQ but I don’t think it shows any hidden orders and it certainly does not show ECN depth.

Another problem, for me anyway with Level 2, is that the average trade size has dropped from over 2000 shares in 1990 to under 500 in 2003 and I think must be even smaller now with the advance of algorithmic trading being used to break up large orders into small packets to ensure minimum effects on prices when working large orders. This makes any Level 2 screen for a suitably liquid high volume stock so quick I’m left at the starting block studying one of these screens while the other screen moves against me in picoseconds. I took the view that even if there was a way to decipher Level 2 profitably it would take me way more than a days coaching at £1,000 to master it.

As I said, I’m no expert and this is just my opinion. It could be that my understanding on hidden orders and depth of market etc is wrong or at best out of date now. Perhaps there are ways of viewing “real” depth via Level 2 – Market Makers who own “seats” at NASDAQ are privy to Level 3 and they do see real depth but I don’t think us mortals can. So if anyone can put me right please do so.

By the way, I think I'm right in saying that IB level 2 used to be worse than useless as it didn't incorporate any of the ECN orders, but that may have changed now.

Hope this helps

Cheers

Gerard

 

[moreagr]

Sirlos,

nice post!!

I also would like to say that they made L2 worse due to the MM now only showing as little as 100 shares on the book and can refresh their orders even if the intent was to sell/buy over 10k shares.at least last year they were required to post 1k of the offer. I think this is for NYSE stocks but not sure for nas.

I have the same problem due to refreshing and not knowing how much shares they are selling which really makes it difficult to guage direction. the best advise is what Iraj said look at the direction of the market and the stock should move in accordance to the index if it is not weak.

 

[belflan]

Hope this helps

Yes it does, very much so.

my questions on L2 are just out of interest and your lenghtly and well thought out post gives me all i need to know for now (until i get that seat on the NAS sorted out.. lol)

thank you very, very much for taking the time to do this

belflan

 

[AnEdge]

Hi,

Just to add a little more perspective on Level II, which has already (and accurately covered here).

As stated, it used to be really useful before decimalization...many day traders made a living off using Level II and SOES trading (sending an order for upto 1000 shares and being guaranteed a fill at the displayed price). This was before full electronic automation of the market makers role.

Now, Level II has limited use...primarily due to the fact that it only shows a part of the picture and can be manipulated to help get a block execution off:
1) Electronic Order Types. For example, the NASDAQ Reserve order type enables executing Broker/Dealer to show only a portion of the total order size and it is automatically updated.
2) Algos. I was at a conference last month where a major US BD was demoing their latest block execution algo and showing how it will automatically submit larger volume limit orders to "push" the market in the direction it needs to help execute the block. These "spoof" orders are never hit because as the market moves, they move (lookup Pegged orders for more info)

 

[dcraig1]

I'll be a bit of contrarian here and maintain that use of the DOM for stock index futures does bring something to the table. As for stocks I don't have an opinion.

But you need to process the LII data stream and turn into one or more time series. It's real hard and very demanding to just watch a DOM ladder and extract anything useful. A lot of hand waving goes on about flipping and faking, but if you actually look at the data, it's the exception rather than the rule.

The main mechanism in question is the tendancy of markets to move towards liquidity until supply exceeds demand. At that point there is of course a reversal, if only a momentary one. Futures are not really the same as stocks, and can be thought of as having two supply demand pairs - demand/supply of longs and demand/supply of shorts.

IMHO, orderflow / market delta used with stock index futures can help in nailing the turning points identified by multi timeframe cycle analysis. And it can help keep you away from some horrible mistakes on high trending (non-technical) days.

I'd post a couple of illustrative charts, but I can't upload attachments. (I'm not the only one - this site needs to be fixed).

Incidently the orderflow on the DAX on last thursday and friday was atypical. I interpret it as somebody building a huge long position. The last time I can recall this was in January this year when that idiot from Socgen amassed a stupendously large long postion in European equity futures. Does this mean the markets will go up or down ? I dunno.

I don't want to get into arguments about LII and drag the TT forum down to the level of the rest of T2W (currently abymsal), but rather to suggest that there is something there for anybody with the programming skills to extract it. At least for stock index futures.

 

[dcraig1]

Incidently the orderflow on the DAX on last thursday and friday was atypical. I interpret it as somebody building a huge long position. The last time I can recall this was in January this year when that idiot from Socgen amassed a stupendously large long postion in European equity futures. Does this mean the markets will go up or down ? I dunno.

I guess that question is answered - DAX up BIG. Asia up BIG.