Post by DiamondWon on Oct 20, 2004 11:30:06 GMT -5
Posted by George Burns on Proboard 32
Understanding LII
« Thread started on: Today at 10:05am » <br>
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This is a pretty good read. Cut and pasted from about.com so you don't have to deal with their pop ups...
Level II Games People Play
Level II is indeed a useful tool. Useful if used correctly, of course. But, it shouldn't be looked upon as a tell all, as something that gives all the answers. There is indeed plenty of deception that goes on within that window.
And that's part of the game. It's why it can't be used alone. It's why we need a tape, and a chart, and some leading stocks along with futures as potential indicators. And even with all of those aides we may not be able to decipher what is truly going on in the Level II window soon enough to make profitable use of it.
But we can often have a very good idea of what is happening. Not a certainty, but at least we can get an idea of when the odds are in our favor. And that's when action is needed.
Of course, some of the games that go on in Level II must be understood so they are properly interpreted.
The following items can all actually be related in that a market participant can use them all at the same time. So understand they aren't mutually exclusive, even though I will go over them one by one.
Refreshing Orders
Refreshing orders can be most annoying when you are in the direction against them and most pleasing when they happen on your side. What exactly are they, and why are they?
First, a description. A refreshing order is one in which far more than the posted, or advertised, size is being printed. For example, moscow may be offering 1,000 shares at 41. Yet, trade after trade after trade goes across the tape. 1,000 here, 500 there, 700 here, 200 there, etc. Much more than 1,000 shares is being printed.
And this is not limited to the offer side or to an MM. INCA might be bidding 40 1/2 for 500 shares. Yet trade after trade gets printed at the 1/2, totaling far more than 500 shares.
What's going on? Simply put, someone is hiding their size. They are not advertising their true order in hopes they can get it all executed. Imagine in the example above that moscow is really selling 250,000 shares at the point. How many people do you think are going to go attacking that bid? Meanwhile, how many others are going to step in front of moscow, even by 1/256, and get short, betting that the buyers would run out of fire power before the big MM? The moscow MM for this particular stock isn't stupid. He is not going to "show his hand." Rather, he hides the true order size in an attempt to get it done.
This is where identifying the ax (the subject of a future article) is so important. Some parties might have a big order only at one level and will be all out when they are done there. Others may hold the stock back, or up as the case may be, all day. Trading with the ax isn't a bad idea, unless you think the buyers will take him out. But don't think for a second he won't be refreshing all of the livelong day.
Fake Outs
Fake outs occur when MMs attempt to get you to react to an action of theirs. This reaction will play right into their hands.
For example, let's say WXYZ has been falling all day. And all day MLCO has been on the bid, holding the stock up. It is down two, but you know without MLCO holding it up it would probably be down five.
Now, late in the day, maybe 3:15, MLCO gets hit for all his stock at 45. All of a sudden he jumps to the offer, something he hasn't done all day, at 45 1/16! WHOA! Merrill must be done buying! Now the stock is going to go into freefall.
Yet the stock only drops 1/4 before MLCO pulls the offer, shows up on the bid again, and the stock turns around and runs 1 1/2 points. All the while there are no offers in site to take so you can cover that short you just got into.
Well, you've just been faked out. Merrill created even more selling pressure so he could buy more stock than he might have been able to had he not pulled that little rouse.
The toughest thing is determining whether a fake-out is a fake-out or an actual change of intent.
Hiding True Intentions
Hiding true intentions can often be used in conjunction with a fake-out.
Continuing the above example, MLCO may put up a big number for size on the offer. He may offer 10,000 shares of stock (displayed as 100 in the Level II). MMs, especially the big boys, rarely if ever show more than 1,000 shares. As explained above, why would they?
In this case, when MLCO is 'done' buying and becomes a seller he throws up a major offer. But, just as before, the stock only falls 1/4 before it gets stopped. Only this time INCA stops it. That's right, there is an Instinet order that is refreshing. Even though only 1,000 shares are being bid for, tens of thousands have been printed.
And after quite a bit of selling that MLCO offer at 1/16 for 10,000 shares disappears. It wasn't taken; rather MLCO pulled it, and the stock immediately beings to launch upward off the bottom.
What happened? Well, it's quite likely MLCO was using INCA to hide his identity, along with his size and intentions, in order to buy more stock than he thinks he would have been able to! And chances are he sucked lots of people in. You see, ANYONE can use an ECN. Even an MM.
Not All Inclusive
These surely aren't all of the tricks being used, but they are the more popular and prevalent ones. They are definitely ones that need to be known if you want even the slightest chance of surviving the Level II games people play.
Understanding LII
« Thread started on: Today at 10:05am » <br>
--------------------------------------------------------------------------------
This is a pretty good read. Cut and pasted from about.com so you don't have to deal with their pop ups...
Level II Games People Play
Level II is indeed a useful tool. Useful if used correctly, of course. But, it shouldn't be looked upon as a tell all, as something that gives all the answers. There is indeed plenty of deception that goes on within that window.
And that's part of the game. It's why it can't be used alone. It's why we need a tape, and a chart, and some leading stocks along with futures as potential indicators. And even with all of those aides we may not be able to decipher what is truly going on in the Level II window soon enough to make profitable use of it.
But we can often have a very good idea of what is happening. Not a certainty, but at least we can get an idea of when the odds are in our favor. And that's when action is needed.
Of course, some of the games that go on in Level II must be understood so they are properly interpreted.
The following items can all actually be related in that a market participant can use them all at the same time. So understand they aren't mutually exclusive, even though I will go over them one by one.
Refreshing Orders
Refreshing orders can be most annoying when you are in the direction against them and most pleasing when they happen on your side. What exactly are they, and why are they?
First, a description. A refreshing order is one in which far more than the posted, or advertised, size is being printed. For example, moscow may be offering 1,000 shares at 41. Yet, trade after trade after trade goes across the tape. 1,000 here, 500 there, 700 here, 200 there, etc. Much more than 1,000 shares is being printed.
And this is not limited to the offer side or to an MM. INCA might be bidding 40 1/2 for 500 shares. Yet trade after trade gets printed at the 1/2, totaling far more than 500 shares.
What's going on? Simply put, someone is hiding their size. They are not advertising their true order in hopes they can get it all executed. Imagine in the example above that moscow is really selling 250,000 shares at the point. How many people do you think are going to go attacking that bid? Meanwhile, how many others are going to step in front of moscow, even by 1/256, and get short, betting that the buyers would run out of fire power before the big MM? The moscow MM for this particular stock isn't stupid. He is not going to "show his hand." Rather, he hides the true order size in an attempt to get it done.
This is where identifying the ax (the subject of a future article) is so important. Some parties might have a big order only at one level and will be all out when they are done there. Others may hold the stock back, or up as the case may be, all day. Trading with the ax isn't a bad idea, unless you think the buyers will take him out. But don't think for a second he won't be refreshing all of the livelong day.
Fake Outs
Fake outs occur when MMs attempt to get you to react to an action of theirs. This reaction will play right into their hands.
For example, let's say WXYZ has been falling all day. And all day MLCO has been on the bid, holding the stock up. It is down two, but you know without MLCO holding it up it would probably be down five.
Now, late in the day, maybe 3:15, MLCO gets hit for all his stock at 45. All of a sudden he jumps to the offer, something he hasn't done all day, at 45 1/16! WHOA! Merrill must be done buying! Now the stock is going to go into freefall.
Yet the stock only drops 1/4 before MLCO pulls the offer, shows up on the bid again, and the stock turns around and runs 1 1/2 points. All the while there are no offers in site to take so you can cover that short you just got into.
Well, you've just been faked out. Merrill created even more selling pressure so he could buy more stock than he might have been able to had he not pulled that little rouse.
The toughest thing is determining whether a fake-out is a fake-out or an actual change of intent.
Hiding True Intentions
Hiding true intentions can often be used in conjunction with a fake-out.
Continuing the above example, MLCO may put up a big number for size on the offer. He may offer 10,000 shares of stock (displayed as 100 in the Level II). MMs, especially the big boys, rarely if ever show more than 1,000 shares. As explained above, why would they?
In this case, when MLCO is 'done' buying and becomes a seller he throws up a major offer. But, just as before, the stock only falls 1/4 before it gets stopped. Only this time INCA stops it. That's right, there is an Instinet order that is refreshing. Even though only 1,000 shares are being bid for, tens of thousands have been printed.
And after quite a bit of selling that MLCO offer at 1/16 for 10,000 shares disappears. It wasn't taken; rather MLCO pulled it, and the stock immediately beings to launch upward off the bottom.
What happened? Well, it's quite likely MLCO was using INCA to hide his identity, along with his size and intentions, in order to buy more stock than he thinks he would have been able to! And chances are he sucked lots of people in. You see, ANYONE can use an ECN. Even an MM.
Not All Inclusive
These surely aren't all of the tricks being used, but they are the more popular and prevalent ones. They are definitely ones that need to be known if you want even the slightest chance of surviving the Level II games people play.
