Replies to post #505 on Money 101 (Money)

[Stock Lobster]

fyi: Introduction to Level II (level 2, L2, L II, Lii)

From StockJock-e's excellent post on Hot Stock Market:
http://www.hotstockmarket.com/forums/showthread.php?t=35169

You have probably heard of Level 2 quotes and are wondering what they are, how to use them and how to get them. Good news! All your questions will now be answered.

When you get a normal stock quote, you see the price of the last trade, the volume and the change from the previous price, this can be called a Level 1 quote.

Level 2 (L2, LII) is an essential tool that any serious trader requires. L2 lets you look behind the scenes at what is going on beyond the current bid and ask of a stock and gives you a clear snapshot of how much demand and supply there is at that precise moment in time.

The most basic and fundamental rule of the markets is that there are only two things which make any stock move, supply and demand.

- If there is a lot of demand for a stock, the price will go up.
- If there is a lot of supply, a stock will go down.
- If demand matches supply, the stock will go sideways.

Congratulations, you now know the secret of the stock markets!

Understanding Level II

http://img508.imageshack.us/img508/3212/level290459aers8ad8.jpg

To begin understanding level II you must understand how an open market works.

Let us use an example of your neighbor Frank who is selling his car for $5000.

You friend Lisa wants to buy his car, but lowballs the offer at $4800. Your other friend John also wants to buy the car, and since he knows that Lisa offered $4800, he has to offer a better price to get it, so he comes in at $4900.

As it turns out, your other neighbor Bob has the exact same car for sale, he heard that Frank is selling his for $5000, but Bob wants to get rid of his car fast, so he prices it at $4950.

What we have here is a market of two buyers and two sellers. If this car sale had a level II quote, it would look like this:

Buyers ----------- Sellers
JOHN $4900 | BOB $4950
LISA $4800 | FRANK $5000

Does this look like something you have seen somewhere before? (hint: image above)

You can clearly see that John is the highest bidder and Bob is the lowest seller. Odds are if John wanted to grab the car now, he would just meet Bobs price of $4950 (aka hitting the ask), or if Bob wanted to get rid of his car quickly, he could just sell at the highest bid (hitting the bid).

Now imagine this scenario playing out hundreds of times every minute with hundreds of buyers and sellers and now you understand level II.

Level II is essentially an order book for Nasdaq stocks, OTCBB and Pinks also have level II, but you will not find NYSE showing level II.

Instead of John, Bob, Lisa and Frank showing up as buyers and sellers, we have what are called Market Makers or MM’s. When you place an order with your broker, he will route your order through an MM. The MM acts on your brokers behalf, placing the bid or matching the trade for you, in effect, you contol the MM. These MM’s your online broker is using are most likely not people sitting at a desk punching away at their keyboards, but rather, an ECN (electronic communications networks), examples of ECNs are NITE, ISLD and ARCA.

There are basically three different types of players on the level II screen, they are:

• Market Makers (MM) – With most stocks and specifically penny stocks, the MM’s are firms that provide liquidity in the market. They have an inventory of shares and will match orders for other firms and trade for themselves, profiting off the spread (difference between the bid and the ask). In essence, they make the market, this the name.

• Electronic Communication Networks (ECN) - Electronic communication networks are automated systems designed to match buyers and sellers. Anybody from a large financial institutions to small traders like you and me can trade through ECN’s.

• Wholesalers (Order flow firms) – Your online broker will have a relationship with a Market Maker, or several MM’s depending on how much business they do. Brokers who handle large orders may choose to sell this order flow to a wholesaler who will execute them on their behalf. If for example you had a really large order to sell stock in thinly traded WXYZ, your broker does not have the time to sit there all day and make sure you get the best price, he will pass it on to the wholesaler who will take care of it for them.

Examples of useful info you get from Level II

By watching L2 you can see what retail or institutional traders are doing at the moment in time. For example, if you see a large firm like MLCO (Merrill Lynch) repeatedly buying heavily, that could be considered a positive for your stock as opposed to seeing MLCO on the sell side.

Watching a realtime chart in conjunction with L2, you may notice things like each time your stock hits a specific price, a certain MM comes in and supports it, but only when it drops to that price. This could be seen as quiet accumulation or support for the stock, which is a good sign.

Entries and Exits:

To get the most out of your level II quotes, you need to be able to spot entry and exits using technical analysis. You can find my TA tutorial here: http://www.hotstockmarket.com/forums...ad.php?t=27430

Combining TA with L2 will yield some important results. If you can use TA to find a favorable entry, watch your L2 screen as the important pivot points are met. You will note that retail MM’s start coming into the stock at specific points, these are most likely other traders who are using the same signals. Being aware of the support levels and jumping in ahead of other traders will give you an advantage. The same can be said for exit levels.

Example:



Let us say you have done your technical analysis and think INTC is a good buy at $32.50 but you see on your charts that there is a resistance level at $33. Check you level II screen... Hmmm.. look at that. Since you are not the only trader on the planet who uses technical analysis, it seems that there are bunch of other traders who also feel that $33 is a good place to sell, but rather than be so obvious, they have come in below the technical level and are trying to sell at $32.62. This information, combined with your TA is a clear signal that you should not be buying INTC in this area, if anything, you should be going short.

Sneaky Tactics:

Scenerio 1:

Let us say for example that you are Bill Gates and you want to buy 10M shares INTC. Would you a) put in an order for 10M shares or b) put in an order for 100,000 shares and try buy it in small amounts?

Answer ‘b’ is correct. If you simply waltz into the market and put up a huge bid, other traders watching L2 will take this as a signal of strong demand for INTC and start bidding it up, thus causing it to go higher. Accumulating it quietly in small blocks would be the more logical approach if you want to get in at a low price.

Scenerio 2:

You are still Bill Gates, you own 10M shares of INTC that you accumulated quietly, but now you want to sell it as high as possible. Do you a) sell it in small blocks as to not attract attention, or b) flash a huge bid for 10M shares (place the bid well below market, then retract the bid), thus make traders thing there is demand and make them run the stock?

Because Bill is sneaky, he will most likely choose ‘b’, and run the stock, and sell into the fake demand he created. Keep in mind that these tactics are used on both the buy and sell side, so shorters can flash a huge ask, scare people into selling and play the opposite side.

There are plenty of other scenarios will become aware of as you watch what MM’s do during the trading day.



Here we see Merrill Lynch flashing a big bid of 30,000 shares at $32.55, when traders see this kind of thing we think "holy cow! somebody at Merrill wants a boat load of shares, Im going to jump infront of him and he will have to buy them higher up, thus causing the stock to rise!" But hang on! There is MLCO on the sell side with 1000 shares, it could be that MLCO will pull that bid once he gets to sell his shares at $32.59... Keep an eye open for these things

Getting Level II Quotes

Your current broker will most likely offer you level II quotes with your account if you are an active trader. If you broker does not offer it, you can always get level II from Microcapfeed which is our partner site for level II and screeners.

Conclusion

Level II is an essential tool in your trading arsenal. If you are an active trader or just looking for the best entry and exits on your trades, you need to understand both technical analysis and level II.

From here, I suggest you go read RGhonaims 'Exploring Level 2' tutorial:
http://www.hotstockmarket.com/forums...ad.php?t=14938

[Stock Lobster]

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!

Sincerely,

RG

a big thank you goes to ATS for all the help on this



*** Also read JP's explanation on L2 http://tinyurl.com/4wap3 ***

[Stock Lobster]

fyi: How to Read a Detailed Stock Quote Table

http://daytrading.about.com/od/educationtraining/a/quote.htm

A detailed stock quote table provides one with much more information than just the current market price of the stock. Being able to understand a stock quote table is essential when investing in the market. You may obtain detailed stock quotes from any of the major financial sites such as Yahoo Finance or CBS Marketwatch. Here is an example of a detailed stock quote table for Microsoft from Yahoo Finance.

The following explains the major components of a typical detailed stock quote table.

Ticker Symbol: This is the unique 3 or 4 letter name which identifies the stock for purposes of trading on a particular exchange. For example, the ticker symbol for Microsoft is MSFT. If you wish to obtain a stock quote online, you search for a company by its ticker symbol. If you don't know what a particular company's ticker symbol is, you can search for it by company name at most major financial sites such as Yahoo Finance.

Last Trade: The most recent price at which the security was traded. All quotes are updated continuously throughout the day as further trades are made.

Trade Time: The time of the most recent trade of a particular stock.

Change: The difference between the previous day's closing price and the most recent price of the stock.

Prev Close: The last trading price for the stock recorded when the market closed on the previous day.

Open: The price of the stock's first trade of the day. This is the price of the stock as of the market open. Trading opens at 9:30 a.m. Eastern Time.

Close: The close is the last trading price recorded when the market closed on the day.

Bid: The price at which a market maker or stock exchange trader is prepared to buy a particular security from an investor.

Ask: The price at which a market maker or stock exchange trader offers to sell a given security to an investor.

Day's Range: This refers to the price range at which the stock has traded at throughout the day. It represents the maximum and the minimum prices that investors have paid for the stock during a particular market day.

52wk Range: This refers to the price range at which the stock has traded at during the past 52 weeks. It represents the maximum and the minimum prices that investors have paid for the stock during the preceding one year period.

Volume: How many shares of a particular company traded that day.

Change: The difference between the previous day's closing price and the most recent price of the stock.

Market Cap: The value of a company as determined by multiplying the total amount of its outstanding shares by the current market price per share.

P/E: This is the company's Price/Earnings Ratio, calculated by dividing the current stock price by earnings per share from the last four quarters.

Dividend Per Share: This indicates the annual dividend payment per share for a company that currently pays out dividends.

[Stock Lobster]

fyi: Level II: What Is It?
From Robert J. Rak

http://daytrading.about.com/cs/nasdaqlevelii/a/level_ii_2.htm

If you've even thought about becoming a trader there's no doubt you've heard about it. It may have been spoken about like some holy grail. It could have been referenced as something one can't succeed without. They're using it in day trading shops. They're using it at home. It is in, and to be in you've got to have it.

It is level II. Now, what exactly is it?

What It Isn't

Before getting into what it is, let's get clear on what it isn't. It isn't a holy grail. It's not something one can't succeed without. They might be using it in day trading firms and they might be using it at home. You might need it, but you surely don't have to have it.

What it is, is a tool. And it is only one tool. One tool implies there are others, and it is in combination with other tools that Level II truly gains its usefulness.

Understanding Level II isn't a cure all goes a long way to unlocking the power of it.

Level I


A Level I quote is the most basic information available about a stock. It is information available to all at no extra fee. A Level I quote consists of:

Bid
Ask
Quote size
Last trade
Volume
High
Low

Level II


Level II goes a step beyond Level I. It basically reveals the order book for a Nasdaq stock. But it's not the complete order book, rather it shows the best bid and offer of every market participant who is publicly posting a quote.

The upper part of this Level II display should look familiar, it is basic Level I information. In this example we have, left to right, top to bottom:

Last, Last Size, Change
Bid, Ask, Quote Size
Open, Low, High

To the right is what should be another familiar tool, the tape, or the ticker. It is a list of trades as they happen. The price is given as well as the number of shares traded. Upticks are shown in green, downticks in red, and zero ticks in gray.

But the information we're interested in, at least in this article, is the Level II information that makes up the rest of the display.

On the left side are the current bids of market participants, ranked from best to worst, highest to lowest. On the right are the offers, again ranked from best to worst, here from lowest to highest.

Each line in the display gives three pieces of information. The market maker ID, a four letter identifying code, the price bidding or offering at, and the number of shares being bid for or offered.

For example, on the offer side, the fifth offer down reads as follows:

MSCO 89 1/2 10

What is this telling us? Morgan Stanley is offering 1,000 shares of Sun Microsystems (SUNW) at 89 1/2. Now, where did I get that? MSCO is the market maker ID of Morgan Stanley. Since moscow is on the right side, or offer side, of the window, it is selling stock. The price it would like to sell at is 89 1/2. It is selling 1,000 shares as evidenced by its size of 10 (all sizes shown are in hundreds).

At this point I'm sure you have some questions. I'll try and knock them out one by one.

First, why are some IDs in red while others are black? Easy, in this Level II display (provided by RediPlus) market makers and order flow firms are shown in black while ECNs are displayed in red. If you're not familiar with these participants and how they differ don't worry, that's the subject of a future article. For now just understand there is a significant different between the two.

Levels and Colors

Second, what's with all the colors, the apparent striations? There does seem to be a method to the madness, doesn't there? But of course. Being included in a different color band separates each different price level. As has become standard in Level II displays the first level, or the inside market, which includes the best bid and best ask, is colored yellow.

The second level, which is one level away from the inside market, is in green. Beyond these two first levels the standardization isn't so standard. As we'll learn later the first two levels are the most important anyway. The colors of other levels aren't important. So long as you can quickly see the difference between levels the display is doing the job.

Based on the previous paragraph, if you were asked to look at the above picture for only a second, what would be your answer to the following question: are there more buyers or sellers at the inside market? A quick glance would allow you to see the yellow band is thicker on the bid side, thus there must be more buyers. And there you have it, the reason for the color madness.

Depth

And the last discussion leads into the current discussion. Let's look at three different stocks in a Level II display to see the difference between thick stocks and thin stocks.

SDL (SDLI) is a very thin stock. How do I define thin? A couple of things lead me to this summation:

-Wide spread: while 7/16 may not seem to be too much for such a high priced stock, this spread is in fact small for SDLI (guess I should have waited for a better moment to capture the image!)

-Few participants at each level: I can't find a price level with more than two participants; most have only one. The first two levels contain three participants on the bid side and only two on the offer.

-Small Sizes: the largest size shown is 800 shares, most are under 500.

-Price differences between each level vary widely: going down the first few levels on the bid side we see from the best bid we drop down 1/16, then 5/16, then 3/16, 1/4, 1/4, 3/16, 1/16, 1/8, 1/4, 9/16, etc.

SUNW is thicker than it is thin, and as you can see much thicker than SDLI:

-Small spread: 1/16 is generally the smallest you will normally see

-Plenty of participants: the first two levels on the bid have eight players and there are twelve on the offer.

-Ample Sizes: there is a good mix of small and large size.

-Price difference between each level is only 1/16

And we end with Cisco (CSCO), quite a thick stock:

-Small spread: 1/16 is generally the smallest you will normally see

-Plenty of participants: the first two levels on the bid have seventeen players and there are sixteen on the offer.

-Ample Sizes: there are plenty of large sizes along with some huge ones.

-Price difference between each level is only 1/16


Game...

...but not set or match yet. The story has only just begun. There is much more to Level II, but with this information you should at least be able to understand what you see in the window. Additional information will come in the future. Until then, don't be shy to ask if you didn't understand everything.