This is a board for Level2 education. I will use the iBox for links to articles, web sites and user posts that are relevant to Level2 education. Please do not discuss stocks on this board except to ask for Level2 specific information about a particular stock or to use a stock as an example for your question. Posts not geared toward the greater good will be deleted. iBox suggestions and links to sites or posts that I can use in the iBox can be sent to me via PM.
There is no such thing as a stupid question. If you don't know, or are just looking for clarification, just ask.
The Q&A's cover the questions and answers from the board and other information so it will be the first place for newcomers to check for answers. But feel free to expand on anything you find there.
THIS IS A MUST READ - Education - Level 2 on internetplays.com http://www.internetplays.com/education/level2.php
Posted by Lowman, Market Maker Speaks Out #msg-15625415
Introduction to Level II Posted by StockJock-e on hotstockmarket.com http://www.hotstockmarket.com/forums/showthread.php?t=35169
Explore Level II Posted by RGhonaim on hotstockmarket.com http://www.hotstockmarket.com/forums/showthread.php?t=14938
Market Makers (MM's) reposted by wing_walker on iHub #msg-21536450
Bill Panetta's list of MM's reposted by $brich$ on iHub #msg-21384915
MM list on otcbb.com http://otcbb.com/dynamic/tradingdata/download/mmids.txt
Current MM list at allstocks.com http://www.allstocks.com/markets/Market_Makers/market_makers.html
Kenneth Klaser letter dated 6/26/2000 to the SEC about MM manipulation, old but a good read http://www.sec.gov/rules/concept/s72499/klaser1.txt
--------------------------------------------------------------------------------Question and Answer section-----------------------------------------------------------------------------------------------------------------
****** Q&A's updated 9/11/07 - added ECN information ******
Q: What is Level 1?
A: A service which displays the real time highest Bid and lowest Ask quotes along with volume and the last days price.
Q: What is Level 2?
A: A service containing Level 1 information plus quotes from all the MM's who are actively trading a stock.
Q: What is Level 3?
A: A service containing Level 2 information plus the ability to enter quotes and send orders to the market. It is a restricted service available only to the MM's. It is the service they use to trade with.
Q: What is a Market Maker or MM?
A: A broker or dealer who holds an inventory of shares for the stocks it handles making a market for those stocks displaying their Bid and Ask prices.
Q: What are the Bib and Ask prices?
A: The Bid is where MM's are holding buy orders at, the Ask is where they are holding sell orders at.
Q: Why do some stocks have a larger spread between the Bid and Ask than others?
A: Larger cap stocks that are more liquid will have a smaller spread than a smaller cap stock that is less liquid. You will generally want to see a smaller spread.
Q: What does the term liquidity mean in the stock market?
A : Liquidity is determined by the volume and the ability to sell a stock quickly. High volume stocks which are easier to trade are considered more liquid.
Q: Why do different MM's show different Bid prices on the same stock?
A: Each MM displays the highest buy orders they are holding. When the MM at the top of the list has filled his orders he will drop of and the next MM in line will be displayed as the current best offer. If a new MM comes in with a higher buy order or a current MM receives a higher buy order, he will go to the top of the list.
Q: Why do different MM's show different Ask prices on the same stock?
A: Each MM displays the lowest sell orders they are holding. When the MM at the top of the list has filled his orders he will drop of and the next MM in line will be displayed as the current best offer. If a new MM comes in with a lower sell order or a current MM receives a lower sell order, he will go to the top of the list.
Q: The Bid and Ask prices are the same? What's going on?
A: Called a Locked Market, where opposing MM's Bid and Ask prices match. There is no advantage for the MM's, it's just a coincidence.
Q: What is a Raw Data / Time and Sales display?
A: A display showing tick by tick each trade that goes through the market. The date, time, price and volume of each trade is displayed along with what the Bid and Ask prices were at that time. This is the data that charts are built from.
Q: While watching Time and Sales, how do you know if a trade was a buy or a sell?
A: A trade at the bid is considered a sell. A trade at the ask is considered a buy. A trade in the middle can go to whichever is closer.
Note: If you are wondering how a trade can go through at a figure outside the current Bid or Ask without the MM list changing is that it happens so quickly there is not enough time for the quote system to react to it but it will show up on a time and sales display.
Q: What is the MM wall or the resistance point on a Level 2 quote?
A: The wall is where one or more MM's are sitting at the same Ask price with large Ask sizes. It usually takes a lot of buying pressure to break through that point. When you see a wall creeping up the Level 2 display during a run it may be a good time to sell.
Q: Why does it mean when someone says the MM's are walking the price down?
A: An MM, investment group or large investor will throw small sells at the bid to drive the price down before accumulating a large amount of shares. They may also drive it down before they cover a short position. Watch for small trades like $5 to $20 at the Bid. There is nothing wrong with the stock, just someone taking the price down to buy cheaper shares.
Q: What MM's do you like to see on the Bid?
A: ABLE, ARCA, BEST, DATA, DOMS, EDGX, EFGI, FRAN, GNET, GNGL, HILL, JEFF, JIMK, MAXM, MURF, NIII, PERT, POND, QUIN, SALI, SCHB, SEAB, STGI, TDCM, TRAC, VERT, VNDM, WDCO
Q: What MM's do you hate to see on the Ask?
A: ACAP, AGIS, ARCA, BAMM, BMIC, BOFA, BRUT, BTRD, CGFL, CHIG, CLYP, ETRD, FANC, GNET, GVRC, HDSN, INCA, ISLD, REDI, JIMK, MAYF, NITE, RBCM, SACM, SBSH, SCHB, SSGI, UBSS, UCAP, VFIN
Q: What are ECN's?
A: ECN, Electronic Communications Network. An automated electronic trading system that allows users to execute trades without going through a Market Maker. Primarily used for Limit orders. It is expensive to use so it is generally used by the big boys or individual investors who do a lot of trading.
Q: Who are the ECN's?
A: ECN list, ARCA, AUTO, BRUT, BTRD, DATA, EDGX, GLBA, GNET, INCA, ISLD, REDI, TRAC. Limit orders are usualy routed to an ECN by your broker. ARCA is the ECN used by Ameritrade. If anyone knows any others please let me know.