Level Ii Quotes - An Inside Look On The Trading Action

If you have been trading stocks for any amount of time, you probably have heard someone mentioning level II quotes. They can help you see what is happening with the price of the stock in real time. They help you see what is going on with the stock price behind the scenes of the normal bid and ask price that you see with your broker's quotes. Normal quotes show you the price of the last trade, the bid/ask, and volume.

What Level II Quotes Show

What type of traders are buying and selling

Who the buyer or seller is

Price of the trade

How many shares are in the trade

The types of traders that are shown on level II quotes are ECN's, MM's, and Wholesalers. ECN's are electronic communication networks which are computerized systems. Anyone from large institutions to regular retail traders can trade through electronic communication networks. MM's are known as Market Makers. They do essentially what their title says, they make the market. The market makers are the one's who buy and sell when no one else is buying or selling. They have an inventory full of stocks and they are required to buy when there are no buyers and sell when no one is selling. The wholesalers take orders from online brokers who sell their trades to the wholesalers. Online brokers do not want to sit and execute trades from retail investors all day, so they sell their orders to the wholesalers instead.

No matter what type of trader shows up on the Level II screen, each trader will have a four letter symbol. If you watch the same stock for a couple days, you will notice that one trader is consistently moving the price more than the others. This specific trader is know as "the ax" and is not hard to find. You should try to trade with the ax because it will increase your chances of making profitable trades.

How Can Level II Help You?

You get an inside look at if large institutions are accumulating shares or dumping shares.

You can see optimal entry and exit points. The market makers will get on the bid when the stock drops to a certain level and the market makers will get on the ask when the price reaches a certain level. If you use this information correctly, it can help you get the best price for your stock.

You can see how weak or strong support and resistance levels are. If there is only one market maker on the ask at a resistance level, it would not be that hard to break through it. But if there are a couple market makers on the ask at the same resistance level, it will be much harder to break the resistance level.

If you plan on being a frequent trader, level II quotes are going to be extremely helpful to you to beat the market. It should not be used by itself to predict price movement, but it should be used along with technical analysis. You will have a much better chance of making profits when using both tactics together, rather than using them alone. Take some time to get used to reading the level II quotes before you start trading with them. Monitor how the bid and ask react when large share sizes are flashed, and look at how the market reacts when a certain MM is on the bid or the ask. You can see a lot more through level II quotes than you ever could with standard quotes from your broker, so utilize them to your advantage and be one step ahead of the other traders.

By: Steven D Miller

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