Nasdaq Level II Screens

The market maker screens show the depth of the market in a specific

stock and the participants within that market. When you look

at a Nasdaq Level II market maker screen you see the market makers

and the ECNs who make up that market. Trying to trade without

Level II capability is like trying to fly a plane without instruments.

The Nasdaq Level II screen shows you information you need to

trade successfully. Level II is also useful for trading the NYSE and

the AMEX. While those exchanges do not show the same information

as the Nasdaq, they do show various expressions of interest.

Knowing what to look for in the Level II screens is important to

short-term entry and exit strategy. Remember, market makers, who

are professionals and must provide liquidity on both sides of the

market, are the ones you are competing against. Never forget that

you are up against professionals who in most cases have more

knowledge, experience, and capital than you do. Remembering this

will keep you humble when you have a series of winning trades.

Controlling the euphoria of winning will keep you from giving back

all your profit. Trade from the alpha zone (you will learn about this

state of mind in Chapter 7), not with your ego or emotion.

Five years ago the market maker screens were far more useful

for entry and exit strategy than they are in the present. When Nasdaq

Level II technology and order routing through ECNs were new,

spreads on stocks were much wider than they are today. As this

technology became increasingly available and more traders began

to trade more extensively, the spreads began to shrink. Market makers

are now using the Level II screens to lure day traders who scalp

into deadly traps. Using Level III and SOES buster software, which

charts the movements of day traders, they bait the trap. Armed

with this information they spring the trap and use the electronic

day trader's own knowledge of trading to their advantage. Compounding

this problem further, most day trading firms that train

traders to scalp have not addressed the changes in reading the

Level II screen. The market is a dynamic place, and change is the

rule, not the exception. If your information is outdated and your

opponent is using it against you, what chance of success do you think you have? Your competition will spend time and money to

stay informed and ahead of the learning curve, and so must you.

The first one to the dinner table gets the most food. The last gets

whatever is left. If you are not informed, you may be the main

course. Remember that the market is a food chain.

Level II market maker information is usually associated with

the Nasdaq market and the stocks that trade there. You can use the

Level II screens on the NYSE and the AMEX markets to see the level

of interest in a specific stock. Of course, the depth of information is

not even close to that of the Nasdaq market, but you can see the

bid, ask, and size of all six exchanges. This is certainly better than

looking at one bid and ask on the stock. Let us take a look at the

mechanical components of a Nasdaq Level II market maker screen

of the Nasdaq and the NYSE (see Figures 2.1 and 2.2). We can also

Figure 2.1 Nasdaq Level II market maker box

Used with permission of Townsend Analytics, Ltd.

1. This area shows the active information (high, low, close, time, volume, etc.).

2. This part of the Level II screen shows the bid and ask (offer) side of the market. You

will see both ECNs and market makers. You can see the size and the various orders making up this market. Remember, this size is only what they want you to see. This

is much better than seeing just the active market that most people see.

3. This section shows the order-entry and -routing box from which you buy, sell, cancel

orders, or go short. You can enter your price, the number of shares, and, most

important, the route your order will take: ISLD, ARCA, SOES, or DOT. This part of the

trading configuration is the most powerful; you can place a trade and get a fill, in

most cases, in a few seconds.

4. This vertical color-coded ticker shows the size of the trade. Green is buying and red

is selling.

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1. Here you see the active information (high, low, volume, etc.) for the Level II screen.

2. This part shows the bid and ask (offer) side of the market and the different

exchanges. Because this stock is on the NYSE, the screen doesn't show the different

market makers. You can see the size and the various orders making up this market.

This is much better than seeing just the national best bid or offer (NBBO) that most

people see.

3. This section shows the order-entry and -routing box from which you buy, sell, cancel

orders, or go short. This part of the trading configuration is the most powerful

because you can place a trade and get a fill in seconds. Using the Super DOT will

take longer than using ECNs or SOES.

4. This vertical color-coded ticker shows the size of the trade. Green is buying and red

is selling.

examine the order-routing box and the price ticker. All of this information

is important to your decision-making process.

Figure 2.3 shows a more complete explanation of a Nasdaq

Level II market maker screen with ticker and order-routing box.

The ticker shows the time of a trade, the number of shares, and

the price (see Figure 2.4). In the past, too much emphasis has been

1. Price box: There are two ways of entering a price into the price box. The first is to

simply place the pointer at any price you select on the bid or the ask side of the

screen and click the mouse. The price will appear in the price box. If you want to

raise or lower the price by fractions of a point you can use the up and down buttons

located to the right of the box. This enables you to make small adjustments to the

price very quickly. The second way of entering the price is to use the computer keyboard

and type in the price.

2. Order type: This box is used to identify your order by clicking on the arrow at the far

right of the box. When you click on the arrow you will be able to select a limit order

or a market order.

3. Number of shares: Enter the number of shares by typing the number into the space

available. You can make changes by using the increase and decrease button at the

right.

4. Route; Use this button to select the various options available to route your order.

Make sure the correct route is selected before you make the trade.

5. Yesterday's close: This information can give you a point of reference during the trading

day.

6. Ticker: The ticker shows the most recent trade and the size of the order. The ticker

can be color-coded and has several configuration options. For example, you can set

it to show trades of only 1,000 shares or more.

7. Time: This shows the time at that minute in Eastern Standard Time.

8. Accumulated volume for day: This shows the total accumulated volume for the day

up to that point in time.

9. Last trade: The last trade shows the price of the last trade, whether the price is up

or down for the day, and the direction of change in price of the last trade price uptick

or downtick. The size of the trade is also shown.

10. Change in bid: This shows the last change in the bid and whether it was an uptick

or a downtick. This information is important because you cannot short a downtick

on the bid.

11. High and low: The high and low for the day are shown in this area of the Level II

market maker box.

placed on the ticker and ticker-related information. This information

is colored-coded. In most cases, red identifies selling and green

buying. A mixed market is an even distribution of both buying and

selling. Scalpers use this ticker information in an attempt to make a

fraction of a point on the trade. They are taught to watch this information

and act on it. The problem with this approach is that you are

not really seeing a true picture of what is going on. Time and sales

are full of incorrect data. From mistakes to late reporting, the ticker

is the last thing you should use to enter and exit trades. There is a

way of correcting to some extent the problems with ticker data to

make it a more accurate tool for traders. This will be discussed in

Chapter 6.

The market maker screens show the depth of the market in a specific

stock and the participants within that market. When you look

at a Nasdaq Level II market maker screen you see the market makers

and the ECNs who make up that market. Trying to trade without

Level II capability is like trying to fly a plane without instruments.

The Nasdaq Level II screen shows you information you need to

trade successfully. Level II is also useful for trading the NYSE and

the AMEX. While those exchanges do not show the same information

as the Nasdaq, they do show various expressions of interest.

Knowing what to look for in the Level II screens is important to

short-term entry and exit strategy. Remember, market makers, who

are professionals and must provide liquidity on both sides of the

market, are the ones you are competing against. Never forget that

you are up against professionals who in most cases have more

knowledge, experience, and capital than you do. Remembering this

will keep you humble when you have a series of winning trades.

Controlling the euphoria of winning will keep you from giving back

all your profit. Trade from the alpha zone (you will learn about this

state of mind in Chapter 7), not with your ego or emotion.

Five years ago the market maker screens were far more useful

for entry and exit strategy than they are in the present. When Nasdaq

Level II technology and order routing through ECNs were new,

spreads on stocks were much wider than they are today. As this

technology became increasingly available and more traders began

to trade more extensively, the spreads began to shrink. Market makers

are now using the Level II screens to lure day traders who scalp

into deadly traps. Using Level III and SOES buster software, which

charts the movements of day traders, they bait the trap. Armed

with this information they spring the trap and use the electronic

day trader's own knowledge of trading to their advantage. Compounding

this problem further, most day trading firms that train

traders to scalp have not addressed the changes in reading the

Level II screen. The market is a dynamic place, and change is the

rule, not the exception. If your information is outdated and your

opponent is using it against you, what chance of success do you think you have? Your competition will spend time and money to

stay informed and ahead of the learning curve, and so must you.

The first one to the dinner table gets the most food. The last gets

whatever is left. If you are not informed, you may be the main

course. Remember that the market is a food chain.

Level II market maker information is usually associated with

the Nasdaq market and the stocks that trade there. You can use the

Level II screens on the NYSE and the AMEX markets to see the level

of interest in a specific stock. Of course, the depth of information is

not even close to that of the Nasdaq market, but you can see the

bid, ask, and size of all six exchanges. This is certainly better than

looking at one bid and ask on the stock. Let us take a look at the

mechanical components of a Nasdaq Level II market maker screen

of the Nasdaq and the NYSE (see Figures 2.1 and 2.2). We can also

Figure 2.1 Nasdaq Level II market maker box

Used with permission of Townsend Analytics, Ltd.

1. This area shows the active information (high, low, close, time, volume, etc.).

2. This part of the Level II screen shows the bid and ask (offer) side of the market. You

will see both ECNs and market makers. You can see the size and the various orders making up this market. Remember, this size is only what they want you to see. This

is much better than seeing just the active market that most people see.

3. This section shows the order-entry and -routing box from which you buy, sell, cancel

orders, or go short. You can enter your price, the number of shares, and, most

important, the route your order will take: ISLD, ARCA, SOES, or DOT. This part of the

trading configuration is the most powerful; you can place a trade and get a fill, in

most cases, in a few seconds.

4. This vertical color-coded ticker shows the size of the trade. Green is buying and red

is selling.

27 7/16

27 7/16

27 7/16

27 7/16

27 7/16

27 7/16

1. Here you see the active information (high, low, volume, etc.) for the Level II screen.

2. This part shows the bid and ask (offer) side of the market and the different

exchanges. Because this stock is on the NYSE, the screen doesn't show the different

market makers. You can see the size and the various orders making up this market.

This is much better than seeing just the national best bid or offer (NBBO) that most

people see.

3. This section shows the order-entry and -routing box from which you buy, sell, cancel

orders, or go short. This part of the trading configuration is the most powerful

because you can place a trade and get a fill in seconds. Using the Super DOT will

take longer than using ECNs or SOES.

4. This vertical color-coded ticker shows the size of the trade. Green is buying and red

is selling.

examine the order-routing box and the price ticker. All of this information

is important to your decision-making process.

Figure 2.3 shows a more complete explanation of a Nasdaq

Level II market maker screen with ticker and order-routing box.

The ticker shows the time of a trade, the number of shares, and

the price (see Figure 2.4). In the past, too much emphasis has been

1. Price box: There are two ways of entering a price into the price box. The first is to

simply place the pointer at any price you select on the bid or the ask side of the

screen and click the mouse. The price will appear in the price box. If you want to

raise or lower the price by fractions of a point you can use the up and down buttons

located to the right of the box. This enables you to make small adjustments to the

price very quickly. The second way of entering the price is to use the computer keyboard

and type in the price.

2. Order type: This box is used to identify your order by clicking on the arrow at the far

right of the box. When you click on the arrow you will be able to select a limit order

or a market order.

3. Number of shares: Enter the number of shares by typing the number into the space

available. You can make changes by using the increase and decrease button at the

right.

4. Route; Use this button to select the various options available to route your order.

Make sure the correct route is selected before you make the trade.

5. Yesterday's close: This information can give you a point of reference during the trading

day.

6. Ticker: The ticker shows the most recent trade and the size of the order. The ticker

can be color-coded and has several configuration options. For example, you can set

it to show trades of only 1,000 shares or more.

7. Time: This shows the time at that minute in Eastern Standard Time.

8. Accumulated volume for day: This shows the total accumulated volume for the day

up to that point in time.

9. Last trade: The last trade shows the price of the last trade, whether the price is up

or down for the day, and the direction of change in price of the last trade price uptick

or downtick. The size of the trade is also shown.

10. Change in bid: This shows the last change in the bid and whether it was an uptick

or a downtick. This information is important because you cannot short a downtick

on the bid.

11. High and low: The high and low for the day are shown in this area of the Level II

market maker box.

placed on the ticker and ticker-related information. This information

is colored-coded. In most cases, red identifies selling and green

buying. A mixed market is an even distribution of both buying and

selling. Scalpers use this ticker information in an attempt to make a

fraction of a point on the trade. They are taught to watch this information

and act on it. The problem with this approach is that you are

not really seeing a true picture of what is going on. Time and sales

are full of incorrect data. From mistakes to late reporting, the ticker

is the last thing you should use to enter and exit trades. There is a

way of correcting to some extent the problems with ticker data to

make it a more accurate tool for traders. This will be discussed in

Chapter 6.