fyi: EXPLORE LEVEL II
Thanks to RGhonaim's for his first rate tutorial, on HSM. (whoa..his rank is "Stock God". Sensei!) http://www.hotstockmarket.com/forums/showthread.php?t=14938
The In-Depth picture of the supply and demand for a particular stock What's Level II all about?
Let's answer this with an example: Level II is exactly like watching what happens behind the scenes of a movie. In this case, all the group involved into the creation of the movie are the Market Makers (MMs). The people buying the tickets for the movie are us, the stock traders.
What to look for on Level II? When watching a movie behind the scenes, you listen to the producer and the star to see what they have to say about it. On Level II, we are looking for the "producer" and the "star" of the action going on, in this case, the key MMs. I) IMPORTANT LINKS
1. Each MM has his own name abbreviation composed of 4 letters, these can be found in the link below, sorted from A to Z: http://tinyurl.com/2drf7
2. After the end of the month, a monthly share volume report for every stock comes out indicating the number of shares bought and sold by the MMs playing the stock. Hence, these reports are one month delayed.
a) Report for OTCBB listed stocks: http://tinyurl.com/4btzc
b) Report for NASDAQ listed stocks: http://tinyurl.com/6vkxh II) IMPORTANT L2 TERMS
MM (Marker Maker) : The Market Maker buys and sells the stock to brokerage firms.
Ax : The ax is the MM that is in control on the supply/demand of a security or a stock. I also like to call that particular MM "the leader".
CD (Convertible Debenture) : A Convertible Debenture can be converted into trading stock at the option of the holder and/or the issuer at a specified date in the future.
ECN (Electronic Communication Network) : It is an electronic system that brings buyers and sellers together for the electronic execution of trades. It disseminates information to interested parties about the orders entered into the network and allows these orders to be executed. 2 Important filling terms meaning dilution on a stock :
1. S-8 : These are shares paid out by the company for services.
2. SB-2 : These are optionally sold shares by the company to the public via small business issuers. III) The Axes
These are the key players you look for on Level II. It is basically the main MM that always seems to be supporting the bid driving it up, or hitting the ask and driving the PPS down. It is the party who seems to be controlling the action in the stock. The ax isn't always trading the stock in one direction or another. Sometime he is keeping it in a tight range and sometimes he is not there at all and another ax may step forward. Note that there are times where there is no ax present. The point is the ax is the one to watch closer than all other parties or MMs. When you learn to trade with the ax your odds greatly increase.
NOTE : The Axes are usually the ones responsible for S-8 share selling, they will be consistent on the ask until the S-8 is completed. Once that particular MM starts supporting bid, it means that the S-8 is getting close to completion. In the case of viable companies, this is usually followed by a SHARP RISE in the PPS, known as an s-8 bounce. So how do we find the ax ?
The best way to find the ax is through familiarity of the stock. By taking the time to watch the stock trade via Level II the ax will usually become quite apparent. But since we want info now and not wait days to find out, there's a shortcut. It's no substitute for watching the action, but it can at least give you a lead on a few parties to watch closer than others or MMs: The Monthly Share Report.
The key on these share reports is to NARROW THE SELECTION; generally look at the top 5 spots on the report, don't count the ECNs since many other players can use them to buy or sell shares. Don't count retail ECNs like GVRC for this similar reason, and also since most of the traffic is retail. Get rid of unnecessary small MMs since it will not happen that a little guy is going to control a stock.
Note that the ax is not static. On any given day any party can be an ax, there may be one ax in the morning and another in the afternoon and neither of them could be listed in the top ten of the monthly share volume report.
If a big order comes onto the trading desk of a firm that doesn't do big volume in a certain name, the ax will take care of it and command the action.
An ax can easily use an ECN to hide much of their action. They can and will use fake outs. Keeping an eye on Level II will reveal the ax, use the monthly share volume report as a confirmation to your observation.
Example of finding the ax on WNMI : In February, the axes CHIG and UCAP weren't on the report. The run started late march, remember this report is a month delayed. You can get some more DD out of who is diluting by checking S-8's and SB2 fillings, then by looking at the chart before the stock broke out, notice who was soaking more shares than others. IV) MM Behavior On Level II Example of an ax who is selling:
When the market is rallying, the stock has a hard time moving higher, seemingly hitting a wall every time. And every time the wall seems to have the same initials and yet, when the strength subsides, the stock has no trouble falling. And funny enough, the ax seems to be following the stock down. That's where Level II comes into play. You have now found the missing link per se. You can see around the corner and start to see patterns. MM AX is on ask - it means he is driving price down - not good for us because we are buying and not shorting the stock (can't short OTCBB).
The ax seems to be following the stock down, he's killing the stock on the ask! If this behavior is recognized what would be the appropriate course of action? Going long the declines or selling the rallies?
Answer: selling the rallies. Since we can't on OTCBB and Upside is limited every time the stock tries to advance. Instead of trading against the ax and hoping that the buyers will overwhelm him, it is much smarter to sell with the ax and watch the stock fall as buyers pull away. Hence you would short it. The only kind of buying which should be going on is the covering of short positions as necessary. Work with the ax to your advantage. Example of finding the dilutor on RWNT:
Input RWNT into monthly share report. Remember focus on top 5 spots. Don't count wholesalers. VERT is the dilutor. Explanation: Look at April. Then look at May. Nothing in April. Then he dumped 57mil shares in May. You can even go back to March and he wasn't even a listed MM. So he came on in April and then he started his selling. Keep in mind that RWNT is extreme and you're not always going to see that. Example of MM supporting PPS stock northward:
Let's say that a stock (shell) has been lying quietly at $.25 bid $.50 offered. A limit order comes into one of the MMs to buy at $.50 for a thousand shares. Prior to this trade that MM may be "flat" (neither long nor short any shares). He fills the order and is now short 1,000 shares. He may raise his bid hoping to find a seller to "flatten" out his position. But before he realizes it a wave of buyers have come in and cleared out all the $.50 offers. Now the stock is $.50 bid .75 offered. Here comes that "Big" firm he just sold the 1,000 shares to at .50 with another bid for 1000 at .75. He makes this print. Now he is short 2,000 at an average of .625. The market keeps moving and now its .75 bid 1.00 offered. Now he has to make a decision. Just like investors, MM Hate to take a loss. So 9 times out of 10 he will now sell 2000 at 1.00 making him short 4000 but with an average .81. At this time he would love to see a seller at .75 so he can cover his short and make a few but instead the market keeps moving up. Now it is 1.00 to 1.25 and here comes the buyer again at 1.25. He doesn't want to lose the call so now he needs to sell 4,000 at 1.25 to keep his break even point above the bid. Now he is short 8,000. Market moves up to 1.25 bid 1.50 offer here comes the buyer now he feels he must sell 8000 here because "stocks don't go up forever". Now he is short 16,000. And so on and so on. If the stock keeps moving up, before he realizes it he could be short 50k or 100k shares (depending how big his bank is). Finally the market closes for the day and on paper he may look all right in that his "break even" price may be around the closing price. But now he has to figure out how to entice sellers so he can cover this short. It is important to note that if this happened to one MM it has probably happened to most all of them. Some ways MM's entice sellers:
1. Run the stock up with a "tight spread" in a fast market, then "open" up the spread to slow down the buying interest. After it has "cooled off" for a little while lower the offer below the last trade right after a small piece trades on the offer then tighten the spread so that the sellers feel they can take a "quick profit" by "hitting the bid" on the tight spread. Once the selling starts the MM's will walk it down quickly by only making small prints on the way down with the tight spread.
2. Another way is by running the stock up in the morning, averaging up their short then use the above technique to walk it down in the afternoon. Hopefully, after doing this for several days, it will demoralize the buyers. The volume will dry up and the sellers will materialize thinking that the game is over. Contrary to popular opinion, MM usually Do Not Cover in Fast moving markets either Up or Down if they are short. They Short More. They usually try to cover after the frenzy is out of the market. There are many other techniques they use but the above are the most popular.
These techniques work about 9 times out of 10 particularly in a BB market. However, that is because 9 out of 10 BB stocks are BS. Remember what I said above. Most MM's don't have a clue as to the value of a Company until they get trapped. V) S-8 Dilution
Look in the filings of a particular stock for S-8's. The filings aren't that bad of a dilution, some can even be employee stock options. The MM ax will remain on the ask until the S-8 share selling is completed. The price at which they sell isn't important since they are shares TO BE SOLD, the ax won't be looking to BARGAIN SELL THEM.
Once the ax seller steps off ask and starts supporting the bid, look for a run upwards. You will see a lot of market maker shifting as well as MM's need to get ready for stock to reverse into the opposite direction (upwards). You usually want to buy a little right before the S-8 is completed to benefit from such runs.
S-8 share selling doesn't always drive the price down as opposed to any other form of dilution.
Example of an S-8 dilution done smart : BMIC was diluting ONEV, but he did it right and it still ran hard with him selling the whole way up. Look up BMIC's monthly share report on ONEV (APRIL 04). * VI) Key Level II Players:
TOP 5 MOST IMPORTANT (typically out of dilution) : NITE, ETRD, SCHB, TDCM & ARCA.
NITE & SCHB are wholesalers, TDCM a retailer, ETRD a retail ECN and ARCA an ECN.
NITE : This is the king MM of the OTC. He intimides traders and other MMs use that to their advantage knowing that he scares them. That's why NITE is the shaker on most stock runs; he is the most common ax. NITE could be on the ask all the time, he could be leading a dip scaring sellers to his buddies SCHB and TDCM on the bid.
TDCM : Retailer MM, you love him on the bid.
Biggest OTCBB ECNs : GNET, TRAC & DATA - you love them on bids also.
Other ECNs : ARCA, BRUT, BTRD, INCA, INTL, ISLD, REDI
Big Shorters : JIMK, POND, GNET or ARCA (anyone can use GNET, even other MMs because it's an ECN).
Wholesalers : ETRD, HRZG, MASH, NITE, SHWB
Top Retail Dilutors : ACAP, AGIS, BAMM, BMIC, CHIG, CLYP, FANC, FRAN, JIMK, MAYF, NATL, PERT, SACM, UCAP, VERT, VFIN
That's it for Level II, always keep learning!
a big thank you goes to ATS for all the help on this
*** Also read JP's explanation on L2 http://tinyurl.com/4wap3