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TOPIC: Introduction To Level II Quotes

Introduction To Level II Quotes 8 years 1 month ago #636

  • KOSTOCKS007
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Level II can provide enormous insight into a stock's price action. It can tell you what type of traders are buying or selling a stock, where the stock is likely to head in the near term, and much more. Here we explain what level II is, how it works and how it can help you better understand open interest in a given stock.

What Is Level II?
Level II is essentially the order book for Nasdaq stocks. When orders are placed, they are placed through many different market makers and other market participants. Level II will show you a ranked list of the best bid and ask prices from each of these participants, giving you detailed insight into the price action. Knowing exactly who has an interest in a stock can be extremely useful, especially if you are day trading.

The Players
There are three different types of players in the marketplace:

•Market Makers (MM) - These are the players who provide liquidity in the marketplace. This means that they are required to buy when nobody else is buying and sell when nobody else is selling. They make the market.

•Electronic Communication Networks (ECN) - Electronic communication networks are computerized order placement systems. It is important to note that anyone can trade through ECNs, even large institutional traders.

•Wholesalers (Order flow firms) - Many online brokers sell their order flow to wholesalers; these order flow firms then execute orders on behalf of online brokers (usually retail traders).

The Ax
The most important market maker to look for is called the ax. This is the market maker that controls the price action in a given stock. You can find out which market maker this is by watching the level II action for a few days - the market maker who consistently dominates the price action is the ax. Many day traders make sure to trade with the ax because it typically results in a higher probability of success.
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