Massive Black Horse Chromite Discovery

Black Horse deposit has an Inferred Resource Now 85.9 Million Tonnes @ 34.5%

Free
Message: L2 - 0956

Re: L2 - 0956 - What Level 2 information is used for

posted on Apr 11, 2008 03:03PM
Why Use Level II?
Level II quotes can tell you a lot about what is happening with a given stock:
  • You can tell what kind of buying is taking place - retail or institutional - by looking at the type of market participants involved. Large institutions do not use the same market makers as retail traders.
  • If you look at ECN order sizes for irregularities, you can tell when institutional players are trying to keep the buying quiet (which can mean a buyout or accumulation is taking place). We'll take a look at how you can detect similar irregularities below.
  • By trading with the ax when the price is trending, you can greatly increase your odds of a successful trade. Remember, the ax provides liquidity, but its traders are out there to make a profit just like anyone else.
  • By looking for trades that take place in between the bid and ask, you can tell when a strong trend is about to come to an end. This is because these trades are often placed by large traders who take a small loss in order to make sure that they get out of the stock in time.
Tricks and Deception
Although watching the level II can tell you a lot about what is happening, there is also a lot of deception. Here are a few of the most common tricks played by market makers:
  • Market makers can hide their order sizes by placing small orders and updating them whenever they get a fill. They do this in order to unload or pick up a large order without tipping off other traders and scaring them away. After all, nobody is going to attempt to push through a 500,000 share resistance, but if a persistent 10,000 share resistance is there, traders may still think it is a beatable barrier.
  • Market makers also occasionally try to deceive other traders using their order sizes and timing. For example, JPHQ may place a large offer to get short sellers on board, only to pull the order and place a large bid. This will force the new shorts to cover as day traders react to the large bid.
  • Market makers can also hide their actions by trading through ECNs. Remember, ECNs can be used by anyone, so it is often difficult to tell whether large ECN orders are retail or institutional.
Conclusion
Level II can give you unique insight into a stock's price action, but there are also a lot of things that market makers can do to disguise their true intentions. Therefore, the average trader cannot rely on level II alone. Rather, he or she should use it in conjunction with other forms of analysis when determining whether to buy or sell a stock.

by Justin Kuepper (Contact Author | Biography)

Justin Kuepper has many years of experience in the market as an active trader and a personal retirement accounts manager. He spent a few years independently building and managing financial portals before obtaining his current position with Accelerized New Media, owner of SECFilings.com, ExecutiveDisclosure.com and other popular financial portals. Kuepper continues to write on a freelance basis, covering both finance and technology topics.

Share
New Message
Please login to post a reply