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Level 2 Trading: Using Level 2 Quotes For Maximum Profit

September 1, 2024
level ii trading
level ii trading

Have you heard of level II trading quotes but haven’t been able to figure out if it’s something that will help you trade? Using a level II trading platform might not be for everyone, but it’s not as difficult to learn as you might think. Level 2 trading provides detailed order book information that can enhance your trading strategy.

Table of contents

Level 2 Stock Trading

Level II (i.e. Level 2) gives you a better idea of what kind of buying and selling pressure exists at various price levels. The level II trading platform lets you see the best bid and ask from all the other market makers who are quoting the stock.

Level II Trading Software

I recommend using ETrade Pro. It is so much easier to follow my stock trading lessons if you are using the same tools I use. But you don’t have to. The latest Think or Swim platform now owed by Charles Schwab has very similar settings.

What Features Make E*Trade Pro a Good Choice for High Volume Option Trades?

E*Trade Pro stands out among trading platforms, especially for those engaging in high volume option trades. Here are the key features that make it a top choice:

1. Customization Options

  • Dashboards and Layouts: Tailor your viewing experience with customizable dashboards and layouts to keep essential information front and center.
  • Watchlists: Create multiple watchlists to track stocks, options, and other securities in real time.

2. Advanced Trading Tools

  • Options Chains: Access detailed options chains to evaluate strike prices, expiration dates, and implied volatility.
  • Strategy Scanners: Utilize built-in scanners to identify potential trading opportunities based on your preferred strategies.

3. Robust Analytics and Research

  • Technical Analysis: Perform in-depth technical analysis with advanced charting tools, indicators, and pattern recognition.
  • Research Reports: Gain insights from professional research reports and market analysis to inform your trades.

4. Speed and Reliability

  • Execution Speed: Benefit from fast order execution, crucial for high volume trading where every second counts.
  • Platform Stability: Rely on a stable and responsive platform, even during peak trading hours.

5. Educational Resources

  • Webinars and Tutorials: Improve your trading skills with access to a wide range of educational resources, including webinars and video tutorials.
  • Live Support: Get support from live agents who can assist with platform navigation or technical issues.

By offering a blend of customization, advanced tools, and educational resources, E*Trade Pro equips traders to handle high volume option trades efficiently and effectively.

Understanding Options Trading Levels and Their Impact on Risk

When delving into options trading on a platform like E*TRADE, understanding trading levels is crucial as they significantly influence the risk associated with your trades.

  1. Choosing the Right Level: As you set up your account, selecting the appropriate options trading level is vital. Different levels allow various strategies, each carrying its own risk. Higher levels enable complex strategies but come with increased risk.
  2. Potential Pitfalls: Engaging in options trading without suitable knowledge can be risky. Implementing incorrect strategies could lead to significant losses. The risk grows with the level, so an inaccurate choice might severely impact your financial standing.
  3. Margin Trading Risks: If your account involves margin trading, there’s an added layer of risk. Missteps can trigger margin calls, requiring you to deposit additional funds or securities, adding financial strain.
  4. Level Assessment: Your options trading level on E*TRADE depends on details provided in your Options Upgrade Request form. Assessment ensures that your trading capacity aligns with your experience and risk tolerance.
  5. The Need for Education: Before diving into any trading strategies, it’s important to educate yourself thoroughly. Understanding the complexities and inherent risks of each strategy at various levels helps in making informed decisions, ultimately safeguarding your investments.

By carefully considering these factors and preparing adequately, you can strategically manage the risks associated with options trading on platforms like E*TRADE.

What to Consider Before Choosing an Options Trading Level on E*TRADE

When deciding on an options trading level for your E*TRADE account, it’s crucial to weigh several factors to safeguard your investments:

  1. Understand the Risks: Options trading carries significant risks. An incorrect strategy can quickly deplete your account, known as “burning your account.” So, ensure you comprehend the potential pitfalls before diving in.
  2. Level of Experience: Your trading experience should guide your choice. Beginners should start with basic levels to minimize risk, while seasoned traders might explore complex strategies that offer higher rewards but also greater risk.
  3. Account Type Matters: If your account is a margin account, be aware that you could face margin calls. This occurs when the value of your account falls below the broker’s required minimum, prompting you to deposit more funds or securities.
  4. Financial Stability: Evaluate your financial situation. The capacity to withstand losses without having a significant impact on your overall financial health is paramount.
  5. Documentation: The trading level you qualify for with E*TRADE will depend on the information you provide. Filling out the Options Upgrade Request form accurately can impact the trading capabilities assigned to you.

By carefully assessing these factors, you can make an informed decision that aligns with your financial goals and trading expertise.

How to View Bids and Asks for a Specific Strike Price Option in E*TRADE Pro

To view bids and asks for a specific strike price option in E*TRADE Pro, follow these steps:

  1. Navigate to the Option Chain Screen:
    • Begin by accessing the “Option Chain” screen in E*TRADE Pro.
  2. Select the Links Button:
    • Locate and click on the “Links” button situated at the top-right corner of the screen.
  3. Link Your Screens:
    • Choose “Link 1” from the available options.
    • Next, switch over to your “Level II Quotes” screen and also select “Link 1”. You’ll find the “Link” button in the same location as it was on the previous screen.
  4. Select a Specific Option:
    • Return to the “Option Chain” screen. Choose any specific option you are interested in by clicking on it.
  5. View the Bids and Asks:
    • Go back to the “Level II Quotes” screen. The bids and asks for the selected strike price option will now be displayed.

By following these steps, you can easily see detailed bid and ask information for any chosen strike price option directly in E*TRADE Pro.

Customizations in the E*Trade Pro App for Options Trading

The E*Trade Pro app offers a versatile platform for options traders, enabling a range of customizations to enhance your trading experience. Here’s a detailed guide on what you can adjust to tailor the app to your specific needs:

1. Setting Up Level II Quotes

To get a more detailed view of market depth, you can set up Level II quotes. First, navigate to the “Tools” menu located in the top left-hand corner of the screen. Select “Market Depth” from the dropdown. Here, you can type in the ticker symbol to access comprehensive trading information for your selected stock.

2. Linking Screens for Seamless Data Flow

For an efficient workflow, you can link various screens. Start by heading over to the “Option Chain” screen. In the top-right corner, click the “Links” button. Select “Link 1” and switch to the “Level II Quotes” screen to connect “Link 1” there as well. This ensures that data flows seamlessly between these sections, allowing for better real-time monitoring.

3. Drawing Tools for Chart Analysis

The app includes a variety of drawing tools to annotate your charts. For simplicity, you can select the “Doodle” tool from the drawing menu. Options to customize the color and thickness of your drawings are available by clicking the respective icons next to the “Drawing Tool” dropdown menu.

4. Creating a Watch List

To keep track of your preferred stocks and options, you can set up a Watch List. Navigate back to the “Tools” menu and select “Watch List”. This allows you to monitor multiple securities simultaneously, making it easier to spot trading opportunities.

5. Adding a News Window

Staying informed is crucial in trading. To add a news window, return to the “Tools” menu and select “News”. This feature aggregates the latest financial news, helping you make more informed trading decisions.

6. Integrating a Calendar Feature

For tracking important dates such as earnings reports and economic indicators, you can integrate a calendar. Go back to the “Tools” menu once again and select “Calendar”. This helps you stay on top of events that could impact your trading strategy.

By leveraging these customizations, you can optimize the E*Trade Pro app to suit your trading style and needs, making your trading experience more efficient and informed.

Creating and Customizing a Watch List in E*Trade Pro

Creating and customizing a Watch List in E*Trade Pro is a straightforward yet powerful way to monitor your favorite stocks. Here’s a step-by-step guide to get you started:

Setting Up Your Watch List

  1. Access the Tools Menu: Go to the top navigation bar and click on the “Tools” menu.
  2. Select Watch List: From the dropdown menu, choose “Watch List”. This action will open a new Watch List window.

Adding Stocks to Your Watch List

  1. Find the Symbol Column: In the Watch List window, locate the column labeled Symbol.
  2. Enter Stock Tickers: Click on the boxes under the Symbol column and type in the ticker symbols for the stocks you wish to track. Repeat this for each stock you want to add.

Customizing Your Watch List

  1. Adjust Window Size: Resize the Watch List window to fit only the stocks you’ve added. This helps keep your workspace uncluttered.
  2. Additional Elements: Consider adding other elements or tools alongside your Watch List for a more comprehensive view of your investments.

By following these steps, you’ll have a tailored Watch List that keeps you informed and organized, enhancing your trading efficiency on E*Trade Pro.

Exploring the Calendar Window in E*Trade Pro

The calendar feature in E*Trade Pro is a powerful tool for staying informed about crucial financial events. Here’s a detailed look at the type of information you can access through this feature:

Key Information Available:

  1. Earnings Reports: View upcoming and past earnings announcements for the stocks you’re interested in. This helps you stay updated on a company’s financial performance.
  2. Dividend Dates: Easily track when dividends are declared and paid out. This is useful for income-focused investors looking to plan their cash flow.
  3. Stock Splits: See scheduled stock splits, which can impact your investment strategy and portfolio valuation.
Calendar interface in E*Trade Pro.

How to Use the Calendar

  • Access Through Tools Menu: Start by navigating to the Tools menu and selecting the Calendar option.
  • Interactivity: Click on any specific event listed in the calendar. This action will provide more detailed information, such as the time and particulars of the earnings report or the implications of a stock split.

The calendar is designed to be user-friendly, making it straightforward to keep track of important dates and events that can influence your investment decisions.

How to Set Up a Research Tab in E*Trade Pro

Setting up a research tab in E*Trade Pro involves organizing several key elements to streamline your stock analysis process. Here’s a step-by-step guide to get you started.

Setting up Watchlist, News, and Calendar widgets in E*Trade Pro.

1. Configure the Watch List

First, create a Watch List, which will serve as your hub for monitoring stocks.

  • Navigate to the “Tools” menu.
  • Select “Watch List” from the dropdown.
  • Customize your Watch List by entering ticker symbols under the Symbol column.

To keep your workspace efficient, ensure the Watch List window only displays the stocks you’ve added. This will allow room for additional tools.

2. Add a News Window

Next, incorporate a News window to stay updated on relevant stock news.

  • Head back to the “Tools” menu.
  • Choose “News”.

Position this window directly beneath your Watch List. This layout lets you quickly switch from viewing stock performance to reading the latest news.

3. Include a Calendar Window

Finally, add a Calendar window to track important financial events.

  • Return to the “Tools” menu.
  • Select “Calendar”.

The Calendar window provides vital information on earnings reports, dividend dates, and stock splits. You can click on individual events for more details, helping you stay informed on key occurrences impacting your stocks.

By following these steps, you’ll have a well-organized research tab in E*Trade Pro, making it easier to keep abreast of your investments and related news.

Level II Quotes Etrade

The Etrade Pro screen, that you drag and drop tools from, refers to the level II trading tool as the “Market Depth” tool.

To use the Market Depth tool:

Click on “Tools” at the top of screen then select “Market Depth”:

level-ii-trading

The Market Depth window will appear with the symbol for the Nasdaq-100 tracking stock (QQQ) loaded. To view market depth for another security (either a stock or option), enter the symbol in the Symbol field, and then hit Enter on your keyboard. You can also select a recently entered symbol by using the pull-down menu in the Symbol field.

level-ii-trading-screen2

Setting Up Level II Quotes for Option Chains in E*Trade Pro

If you’re looking to get the most out of your trading by setting up Level II quotes specifically for option chains in E*Trade Pro, follow these steps:

  1. Navigate to the Option Chain Screen:
    • Start by heading over to the “Option Chain” screen in E*Trade Pro.
  2. Access the Links Menu:
    • In the top-right corner of the Option Chain screen, find and select the “Links” button.
  3. Select Link 1:
    • From the drop-down menu that appears, choose “Link 1”.
  4. Switch to Level II Quotes Screen:
    • Now, go to your “Level II Quotes” screen, and similarly select “Link 1” here as well (the “Link” button will be located in the same place as on the Option Chain screen).
  5. Verify Connection:
    • Though it may seem like nothing has changed, the linking process is now complete. When you return to your “Option Chain” screen and click on a specific option, you should now observe that the Level II Quotes screen reflects this selection.

Benefits of Level II Quotes with Option Chains

With this setup, you’ll gain valuable insights into the following:

  • Bid and Ask Prices: Instantly see the current bids and asks for the specific strike price options you’re interested in.
  • Volume Information: Determine the number of contracts available at various price levels, which is crucial when planning to buy a significant amount of shares or options.

Why Level II Quotes Matter

If you’ve ever faced difficulty entering or exiting a trade, it’s likely due to a lack of depth in market data. Level II quotes provide a more detailed view, showing you exactly at what prices people are willing to buy or sell and how many shares or options are available.

By following this guide, you’ll be better equipped to make informed trading decisions, avoiding the pitfalls of insufficient market data.

Setting Up Level II Quotes for Option Chains in E*Trade Pro

If you’re looking to get the most out of your trading by setting up Level II quotes specifically for option chains in E*Trade Pro, follow these steps:

  1. Navigate to the Option Chain Screen:
    • Start by heading over to the “Option Chain” screen in E*Trade Pro.
  2. Access the Links Menu:
    • In the top-right corner of the Option Chain screen, find and select the “Links” button.
  3. Select Link 1:
    • From the drop-down menu that appears, choose “Link 1”.
  4. Switch to Level II Quotes Screen:
    • Now, go to your “Level II Quotes” screen, and similarly select “Link 1” here as well (the “Link” button will be located in the same place as on the Option Chain screen).
  5. Verify Connection:
    • Though it may seem like nothing has changed, the linking process is now complete. When you return to your “Option Chain” screen and click on a specific option, you should now observe that the Level II Quotes screen reflects this selection.

Benefits of Level II Quotes with Option Chains

With this setup, you’ll gain valuable insights into the following:

  • Bid and Ask Prices: Instantly see the current bids and asks for the specific strike price options you’re interested in.
  • Volume Information: Determine the number of contracts available at various price levels, which is crucial when planning to buy a significant amount of shares or options.

Why Level II Quotes Matter

If you’ve ever faced difficulty entering or exiting a trade, it’s likely due to a lack of depth in market data. Level II quotes provide a more detailed view, showing you exactly at what prices people are willing to buy or sell and how many shares or options are available.

By following this guide, you’ll be better equipped to make informed trading decisions, avoiding the pitfalls of insufficient market data.

Understanding E*TRADE Level 2 Options Trading

E*TRADE’s Level 2 options trading allows investors to employ a diverse strategy mix, building on the foundational tactics of Level 1. Here’s a breakdown of what Level 2 entails:

  • Synthetic Long Puts: This involves constructing a position equivalent to owning a long put option without actually purchasing one, by using a combination of other options.
  • Married Puts: Investors protect their stock by purchasing a put option, essentially creating a safety net for the underlying asset.
  • Long Calls: Here, traders purchase a call option, betting on the underlying stock to increase in value.
  • Long Puts: This strategy is used when anticipating a drop in the stock value, involving the purchase of a put option.
  • Long Straddles: A simultaneous purchase of both a call and a put option with the same strike price and expiration date, capitalizing on significant stock movement in either direction.
  • Long Strangles: Similar to straddles but involves buying a call and a put option with different strike prices to capture profits from extreme volatility.
  • Covered Puts: This involves shorting a stock and simultaneously selling a put option, aiming to generate income with a capped profit potential.
  • Cash Secured Puts: Traders sell put options and set aside enough cash to purchase the stock at the strike price if assigned.

E*TRADE Level 2 options trading presents more sophisticated strategies compared to Level 1, catering to those ready to navigate complex market movements. This level is ideal for intermediate investors who have a good grasp of options basics and are prepared to explore advanced tactics.

What Should You Consider Before Choosing an Options Trading Level?

Deciding on the right options trading level for your account is crucial, as it can significantly impact your investment experience. Before making a choice, consider the following key factors:

  1. Understanding Risks
    Options trading is inherently risky, and selecting the wrong strategy can lead to substantial losses. It’s vital to educate yourself about the different types of options strategies and their associated risks. This knowledge will help you avoid common pitfalls and make informed decisions.
  2. Experience and Knowledge
    Assess your level of expertise in trading options. Beginners should start with basic strategies that match their comfort and knowledge level. As your experience grows, you can gradually explore more complex strategies suited to higher trading levels.
  3. Account Type
    Check whether your account operates on a margin or cash basis. A margin account may expose you to the risk of margin calls, which require you to deposit additional funds or securities to cover trading mistakes. Ensure you’re prepared to meet these requirements if you choose margin-based trading.
  4. Financial Goals and Risk Tolerance
    Clearly define your financial goals and evaluate how much risk you’re willing to take. Your risk tolerance should align with the trading level you choose, as higher levels often involve more complex and potentially riskier strategies.
  5. Brokerage Requirements
    Each brokerage has specific criteria for granting different trading levels. Familiarize yourself with these requirements and ensure you meet them before applying. This might include filling out additional paperwork or having a certain amount of capital in your account.

By taking these considerations into account, you can select an options trading level that aligns with your financial objectives and risk capacity, setting you on a path toward successful trading.

What Strategies Are Included in Level 1 Options Trading?

Level 1 options trading provides a foundational approach to options strategies, focusing primarily on conservative methods that can generate additional income from your stock holdings. Here’s what you can typically expect:

  • Covered Calls: This is a strategy where you sell call options against shares you already own in your brokerage account. It allows you to potentially earn extra income through option premiums while you’re holding onto your stock.
  • Buy-Writes: Also known as a covered call write, this involves simultaneously purchasing a stock and selling a call option on that same stock. It’s a strategic way to potentially lower the cost basis of the stock purchase through the premium received.
  • Covered Call Roll-Ups/Roll-Downs: These strategies involve adjusting a covered call position. “Rolling up” means buying back the current call option and selling a new call at a higher strike price. Conversely, “rolling down” involves moving to a lower strike price. These adjustments can be used to react to changes in the underlying stock price and maximize returns or manage risks.

By utilizing these basic options trading strategies, investors can effectively engage in options trading with a relatively controlled risk profile.

What Strategies Are Included in Level 2 Options Trading?

Level 2 options trading expands on basic strategies, offering a way to diversify and potentially increase profits. Here’s a breakdown of what’s included:

  • All Level 1 Strategies: Before diving into Level 2, traders should already be familiar with and have a grasp on Level 1 strategies.
  • Synthetic Long Puts: This strategy mimics the payoff of a long put option using other financial instruments, allowing for bearish market positioning without actually purchasing puts.
  • Married Puts: A protective measure where a trader buys a put option simultaneously with owning an equivalent amount of the underlying stock. This acts as an insurance policy against declines in stock prices.
  • Long Calls: Involves purchasing call options with the expectation that the underlying asset will rise in value, offering unlimited profit potential above the strike price, minus the premium paid.
  • Long Puts: This strategy involves buying put options to profit from a decline in the underlying asset’s value. The risk is limited to the premium paid for the option, while profit potential is significant as the asset’s price falls.
  • Long Straddles: Entails buying both a call and a put option at the same strike price and expiration date. It’s ideal for traders expecting significant volatility in the asset’s price, regardless of direction.
  • Long Strangles: Similar to a straddle, but the call and put options have different strike prices. This approach also profits from large price swings in either direction, though it generally requires a broader movement than long straddles to become profitable.
  • Covered Puts: Involves short selling the stock and writing put options on the same asset. This strategy can be used to generate income with the expectation that the stock price will not rise significantly.
  • Cash Secured Puts: Selling put options while simultaneously setting aside enough capital to purchase the stock if assigned. This technique is used to generate income and potentially acquire stocks at a desired price.

Level 2 options trading opens up a wider array of tactical opportunities for those ready to navigate its complexities, bringing both risks and rewards for more experienced traders.

What Strategies are Included in Level 3 Options Trading?

Level 3 options trading expands upon the foundational strategies available in Levels 1 and 2 by introducing more sophisticated techniques. These strategies are designed for those looking to engage in more complex trading approaches. Here’s a breakdown of what’s included:

  • Debit Spreads: This involves buying and selling options of the same class and expiration but different strike prices. Profit potential is capped, but so is the risk.
  • Credit Spreads: A strategy where you sell an option and simultaneously buy another, with the aim of profiting from the net credit received.
  • Calendar Spreads: Utilizes options of the same class and strike price but with different expiration dates, capitalizing on time decay.
  • Diagonal Spreads: Combines elements of both the vertical and calendar spreads, with different strike prices and expiration dates.
  • Naked Short Puts: Selling put options without owning the underlying asset, potentially risky but with the opportunity for significant returns.
  • Butterfly Spreads: Involves multiple option contracts at different strike prices, providing limited risk and limited profit scenarios around a central price.
  • Iron Condors: A strategy combining two credit spreads (a call spread and a put spread), benefiting from low volatility in the market.

These strategies require a strong understanding of market movements and the intricacies of options pricing. They offer traders diverse approaches to manage risk and seek consistent profits.

What Strategies Are Included in Level 4 Options Trading?

Level 4 options trading grants traders access to a wide array of sophisticated strategies, combining techniques from previous levels with more advanced tactics. Here’s a breakdown of what’s included:

  • Level 1 Strategies: Basic options trading, focusing on buying calls and puts for limited risk.
  • Level 2 Strategies: Involves covered calls and cash-secured puts, offering slightly more complexity with income-generating potential.
  • Level 3 Strategies: Introduces spread strategies, including debit spreads, credit spreads, and iron condors, which allow for enhanced risk management and potential gains.
  • Naked Short Calls: Unique to Level 4, this strategy involves selling call options not backed by a corresponding long position in the underlying asset, presenting higher risk but also potentially higher rewards.

This progression to Level 4 enhances a trader’s toolkit, enabling them to employ both protective and speculative strategies, tailored to diverse market conditions.

Account Types Eligible for Options Trading on E*TRADE

When considering options trading levels on E*TRADE, it’s important to know which types of accounts can apply for different levels. Here’s a clear breakdown:

For Cash-Approved Brokerage Accounts:

  • Level One Options: Available for Individual, Joint, Investment Club, Business/Corporate, Trust, and Custodial accounts.
  • Level Two Options: These same account types can also qualify.

For Margin-Approved Brokerage Accounts:

  • You have the opportunity to apply for more advanced options trading, up to Level Four.
  • Eligible accounts include Individual, Joint, Investment Club, Business/Corporate, and Trust accounts.

Understanding these distinctions ensures you select the right account type based on your trading aspirations.

Understanding Level 2 Option Quotes vs. Level 2 Options Trading on E*TRADE

When diving into the world of options trading, it’s crucial to distinguish between level 2 option quotes and level 2 options trading, as they serve distinct functions in your trading experience.

Level 2 Option Quotes

  • Real-Time Pricing: These quotes provide detailed, real-time information about the bid and ask prices for equity options. This allows traders to gain a clearer picture of the market landscape, as they can see multiple layers of pricing beyond the standard level 1 quotes.
  • Market Depth Insight: With level 2 quotes, you gain visibility into the depth of the market. This means observing the various price points and quantities available for buying or selling, enabling more informed trading decisions.

Level 2 Options Trading

  • Advanced Permissions: This refers to the approval status that determines the complexity of the options strategies you can deploy within your brokerage account. It reflects your readiness and eligibility to engage in advanced strategies, such as spreads or straddles, based on your trading experience and financial standing.
  • Strategic Flexibility: Gaining level 2 trading permissions unlocks more complex trading strategies, allowing you to execute trades that involve multiple leg trading strategies or other advanced maneuvers.

In summary, level 2 option quotes give you detailed pricing information to assess the market, whereas level 2 options trading permissions dictate the complexity of options strategies you can implement. Understanding these differences is key to leveraging the full potential of your trading account.

When you dive into options trading on E*TRADE, it’s essential to understand the strategies available at each level. Each level builds on the previous one, offering more complex strategies as you progress.

Level 1: Foundation Strategies

At the entry level, you can engage in:

  • Covered Calls: This involves selling call options on stocks you already own.
  • Buy-Writes: This combines purchasing a stock and simultaneously writing a covered call on it.
  • Covered Call Roll-ups/Roll-downs: Adjust your existing covered call positions based on market movements.

Level 2: Expanding Possibilities

Level 2 includes all Level 1 strategies plus:

  • Synthetic Long Puts: Use options to mimic the behavior of a long put option.
  • Married Puts: Buy a stock and simultaneously purchase a put option in case the stock price decreases.
  • Long Calls and Long Puts: Purchase options that give you the right to buy or sell an underlying asset.
  • Long Straddles and Strangles: Bet on significant price movement in a stock, regardless of direction.
  • Covered Puts: Engage in a short stock and short put position.
  • Cash Secured Puts: Secure potential stock purchases by setting aside cash when selling put options.

Level 3: Advanced Strategies

Alongside Levels 1 and 2, this level allows:

  • Debit and Credit Spreads: Utilize combinations of bought and sold options to manage risk and potential gain.
  • Calendar and Diagonal Spreads: Take advantage of different expiration dates and strike prices.
  • Naked Short Puts: Sell put options without holding the underlying stock, betting the stock doesn’t fall.
  • Butterfly Spreads and Iron Condors: Use complex options arrangements for targeted exposure to market movements with limited risk.

Level 4: Maximum Flexibility

This level includes everything from Levels 1, 2, and 3. The key addition is:

  • Naked Short Calls: Sell call options without owning the underlying stock, betting the stock price stays below the strike price.

This tiered approach ensures that as your understanding and risk tolerance grow, the strategies you can employ become more sophisticated and versatile.

When you apply for an options trading level at E*TRADE, the process involves a careful evaluation of the details you share in your Options Upgrade Request form. Here’s how it works:

  1. Evaluation of Personal Information: They start by reviewing your financial situation, which includes your income, net worth, and investment experience. This gives a comprehensive view of your financial background and risk capacity.
  2. Assessment of Trading Experience: They look at your previous experience with options and other investment products. This includes the years of experience you have and the complexity of transactions you’ve handled.
  3. Understanding of Investment Objectives: You’ll need to specify your investment goals, such as income generation, growth, or speculation. This helps tailor the trading level to align with your objectives.
  4. Risk Awareness: Your understanding of the risks involved in options trading is crucial. Demonstrating a solid grasp of these risks helps in the evaluation process.
  5. Compliance Checks: Finally, the information is cross-referenced with regulatory requirements to ensure compliance and suitability.

Each of these factors combines to help E*TRADE determine the appropriate options trading level that aligns with your profile and objectives.

Final Thoughts on Using E*Trade Pro as a Trading Platform

Navigating the setup of E*Trade Pro can be a bit challenging initially due to limited support from the provider. However, once you get past the initial hurdles, you’ll find it to be a powerful tool for traders.

Highlights of E*Trade Pro:

  • Customizability: This platform offers a vast range of customization options, allowing you to tailor your trading interface to suit your individual needs.
  • High-Volume Trading: Ideal for those engaged in high-volume option trades, providing robust tools and features to manage and execute trades efficiently.
  • User Experience: The interface may take some time to master, but it offers a comprehensive suite of trading tools that can significantly enhance your trading capabilities.

If you seek a trading platform that allows you to personalize your experience and handle high-volume transactions seamlessly, E*Trade Pro is a strong contender worth considering.

How To Read a Level 2 Chart Using Market Depth Tool

On the right hand side of the Market Depth tool is the trade ticker:

how-to-read-level-2-chart

The trade ticker lets you view level 2 stock trading in real-time. This section shows the time and sales data that has occurred. The momentum bar across the top shows the same information in a streaming visual display:

how-to-read-level-2-chart-screen2

The momentum bar is confusing when you first see it, but it’s really not that hard:

halfsize_momo

Here’s what the colors mean. These are level 2 trades where:

A solid green bar appears if the trade was on an uptick
An empty green bar if the trade took place at the same price level as the previous trade (with the most recent price movement being upward)
A solid red bar if the trade was on a downtick
An empty red bar if the trade took place at the same price level as the previous trade (with the most recent price movement being downward)

There are two bar sizes based on trade size:

A narrower bar for trades of 1-9,999 shares or contracts
A wider bar for trades of 10,000 or more shares or contracts

How To Read Level II Quotes

What are level 2 quotes and why do so many traders use them?

Level II quotes give you crazy insight into a stock’s price action. Level II quotes tell you what type of traders are buying and selling a stock and where the stock price is likely headed in the short term.

Level II quotes are overrated in my opinion. ALGOs and quant-trading desks now dominate market action making level II quotes less helpful that they used to be. Nevertheless, you should know how to use Level II quotes.

Understanding Level 2 Market Data vs. National Best Bid and Ask Prices

Level 2 market data provides a comprehensive view of the stock market’s order book. Unlike the national best bid and ask (NBBO) prices, which highlight the highest price a buyer is willing to pay (bid) and the lowest price a seller will accept (ask), Level 2 data goes deeper. Here’s how it differs:

  • Order Depth and Limit Orders: Level 2 displays all limit orders that have been placed below the best bid price and above the best ask price. This gives insight into orders that might be executed if the stock’s price shifts either upward or downward.
  • Detailed Market Maker Quotes: It provides the specific bid and ask prices offered by each market maker, which are often set at various intervals around the NBBO. For instance, if the national best bid for a stock is $10.00, Level 2 might reveal quotes at $9.90, $9.80, etc., illustrating the potential paths prices could take.
  • Market Depth: Often referred to as the “order book,” Level 2 data showcases the entire spectrum of buy and sell orders, not just the top prices visible with the NBBO. This affords traders with strategic insights into how thin or thick the market is.

In summary, while the NBBO provides quick reference points for transaction initiation, Level 2 data offers a granular view of all active price points, allowing traders to evaluate comprehensive market sentiment and liquidity.

Caveats to Consider When Interpreting Level 2 Data

When examining Level 2 data, it’s crucial to be mindful of several potential pitfalls:

  1. Limited Visibility: Not all transactions are visible in Level 2 data. Large institutional investors often disguise major orders by utilizing Electronic Communication Networks (ECNs) or by breaking them into smaller segments. These segments, known as iceberg orders, are only gradually exposed to market makers, allowing these investors to act without drawing attention.
  2. Order Manipulation: Traders can artificially influence perceptions by placing large orders to create the illusion of market support or resistance. For instance, a large buy order might be placed to signal demand, only to be canceled before execution. This tactic can deceive other traders into making decisions based on false pretenses.
  3. Data Interpretation Challenges: Relying solely on Level 2 data can lead to misinterpretation. The data can be manipulated and does not present a comprehensive market picture. To gain a more accurate understanding, it’s advisable to combine Level 2 data with other trading indicators, such as technical chart analysis or volume trends.

By keeping these caveats in mind, traders can develop a more informed and cautious approach when utilizing Level 2 data as part of their trading strategy.

Understanding the Risks of Higher Levels of Options Trading

When exploring higher levels of options trading, it’s crucial to understand the associated risks to manage your financial decisions wisely.

Potential for Significant Losses

Options trading can be risky, and venturing into advanced strategies can amplify these risks. Employing complex tactics without a solid grasp can lead to substantial financial losses. Traders might find themselves in unfavorable positions if market movements are contrary to their predictions.

Margin Account Vulnerabilities

If you’re operating on a margin account, be prepared for the possibility of margin calls. This scenario occurs if your account value dips below the broker’s required minimum. You may then need to add funds or securities to stabilize your trading position, potentially straining your resources.

Complexity of Strategies

Advanced options levels introduce intricate strategies that require a deep understanding of market dynamics. Errors in executing or choosing the wrong approach could severely impact your financial health. Even experienced traders can face challenges in navigating these complexities.

Impact of Personal Experience

Your personal experience and financial situation play a vital role in options trading. Financial institutions, like E*TRADE, assess your ability to handle these risks based on detailed information about your trading experience and financial status. This evaluation helps determine the most suitable trading level for your account.

By keeping these factors in mind, you can better prepare for the risks involved and make informed decisions in your options trading endeavors.

How Can Traders Manipulate Level 2 Data?

Level 2 data offers an intricate view of the order book, but it’s not immune to manipulation by savvy traders. Here’s how they do it:

  1. Iceberg Orders:
    • Large institutional investors can mask substantial orders by splitting them into smaller, manageable chunks. These partial orders—known as iceberg orders—are released sequentially, only showing a fraction of the true volume at any time. This strategy conceals the full extent of the demand or supply, misleading other market participants.
  2. Phantom Orders:
    • Traders may display significant buy or sell orders to create an illusion of market strength or weakness. For instance, a trader may place an enormous order to buy a large number of shares at a specific price level. This makes it appear as though there’s solid support, when in reality, they might cancel the order before execution, tricking others into reacting based on false information.
  3. Order Spoofing:
    • This involves quickly placing and then canceling orders. By doing so, traders create a deceptive image of current market activity, influencing other investors’ perceptions of supply and demand. This tactic can sway short-term price movements without any genuine transactions taking place.
  4. Strategic Block Placement:
    • By splitting large transactions into smaller segments—known as blocks—traders can manipulate how supply and demand appear over time. Each block is carefully released only after the previous one is filled, distorting the perception of continuous trading interest at certain price points.

Proceed With Caution

Given these manipulation tactics, it’s important to remember that Level 2 data should not be relied upon in isolation. Complement it with additional trade indicators like technical analysis to get a full picture of the market. Stay informed and always question the data before making trading decisions.

Why is Liquidity Critical in Analyzing Level 2 Data?

Understanding liquidity is essential when analyzing Level 2 data for a variety of reasons. Primarily, liquidity indicates how easily a stock can be bought or sold without causing a significant impact on its price. This is vital for traders who must quickly execute large orders.

Order Fulfillment

When considering large trades, the volume of outstanding orders at various price levels can determine how smoothly your trade can be executed. A stock with high liquidity features considerable volumes at different prices, ensuring that your trades are fulfilled at the intended prices without delay or price shifts.

Price Volatility

Even if your investment strategy involves smaller trades, liquidity remains crucial. Stocks with lower liquidity often exhibit greater price volatility, which can lead to unexpected price swings. Understanding these factors enables you to better prepare and adjust your risk management strategies.

Strategic Opportunities

For savvy traders, liquidity insights can also reveal strategic opportunities. Highly liquid stocks are generally less risky and provide a cushion against market manipulations. Conversely, low liquidity stocks might offer high-risk, high-reward scenarios.

In conclusion, whether you’re handling large volume trades or adjusting risk strategies, analyzing liquidity through Level 2 data grants a clearer perspective, enhancing your ability to make informed trading decisions.

How to Use Level 2 Data to Analyze Stock Supply and Demand

Level 2 data provides valuable insights into the supply and demand dynamics of a stock. Here’s how you can use it to enhance your trading strategies:

Track Buying and Selling Pressure

  • Order Depth: Level 2 data reveals the buy (bid) and sell (ask) orders at various price levels. Observing whether there are more buy or sell orders can help you understand if investors are leaning bullish or bearish.
  • Price Clues: This information serves as a predictive tool. If more buy orders are piling up at a certain price, it signals strong demand, while a surge in sell orders indicates high supply.

Assess Liquidity Levels

  • Order Sizes: Larger orders in Level 2 data suggest higher liquidity. This is crucial if you’re planning significant trades, as sufficient liquidity ensures your orders can be executed at desired prices without causing dramatic price changes.
  • Execution Assurance: Understanding liquidity helps anticipate potential trade execution issues, enabling you to strategize better.

Prepare for Volatility

  • Liquidity Impact: Stocks with lower liquidity are often more volatile. Recognizing this from Level 2 data can help you mitigate risks and set appropriate trading strategies.

By mastering Level 2 data, you can better predict market movements and execute your trades with greater confidence.

How Combining Level 2 Data with Time & Sales Data Provides Deeper Insights

When trading, understanding the dynamics behind open and executed orders can be crucial. Combining Level 2 data with Time & Sales data offers a more comprehensive view of the market. Here’s how:

1. Visibility into Order Execution

  • Level 2 Data: This provides insight into the order book by displaying open buy and sell orders. It shows what traders are willing to pay or accept for a stock at any given time.
  • Time & Sales Data: This records completed trades, detailing actual prices and sizes at which trades were executed.

By comparing these data sets, traders can discern which orders from the Level 2 display were actually fulfilled. This helps in verifying the authenticity of displayed market intents against executed trades.

2. Identification of Hidden Orders

Not all trades appear on the Level 2 data as open orders. Some orders are executed without being visible, often due to hidden liquidity. Time & Sales exposes these transactions, revealing additional market activities that are not immediately apparent elsewhere.

3. Spotting Market Maker Patterns

Analyzing these two data sources in tandem can highlight dominant market makers. By observing who consistently executes large volumes of trades, traders can identify key players within a particular stock’s market. This information is invaluable for predicting future movements and understanding market sentiment.

4. Detecting Spoofing and Market Manipulation

Spoofing involves placing and then canceling large orders to create false impressions of demand or supply. Cross-referencing Level 2 with Time & Sales can help spot such disparities. When large orders disappear without execution in Time & Sales, it may signal spoofing activities.

Incorporating both Level 2 and Time & Sales data enables traders to unlock insights that are not evident from either data set alone. This duo provides a full-spectrum view of both market intentions and real transactions, offering a strategic advantage in decision-making.

Level 2 Trades

When you place an order to buy or sell a stock, your order is placed through many different market makers and other market participants. The level II quotes will show you the best bid and ask prices from each of these participants. It shows you what people are willing to buy or sell the stock at, and whether there are any big orders at specific prices. We call this the level 2 trading books.

In the context of Level 2 trading quotes, the term “Venue” refers to the specific locations or platforms where trading transactions take place. These venues can include various exchanges and alternative trading systems.

Here’s a quick breakdown:

  • Major Exchanges: Platforms like the New York Stock Exchange (NYSE) or NASDAQ, where securities are bought and sold.
  • Alternative Trading Systems (ATS): These are non-exchange trading venues, such as electronic communication networks (ECNs) that allow investors to trade securities.

Understanding the venue helps traders and investors identify where the trade is being executed, which can affect factors like speed, transaction cost, and market liquidity. This information is crucial for making informed trading decisions.

Each market participant is recognized by the four-letter ID that appears on level II quotes. Here are some of the most popular ones:

Four Letter ID and Market ParticipantFour Letter ID and Market Participant
UBSW = UBS SecuritiesDBAB = Deutsche Bank Alex. Brown
MLCO = Merrill LynchJPHQ = JPMorgan
MSCO = Morgan StanleyGSCO = Goldman Sachs
FBCO = Credit Suisse First BostonSBSH = Salomon Smith Barney
NITE = Knight Capital GroupARCA = NYSE Arca Equities

You will see three different types of traders on your level II trading tool:

Market Makers (MM) – Liquidity in a given market is provided by the market makers. For you to buy a stock, there has to be a seller. For you to sell a stock, there has to be a buyer. Market makers keep a market trading.

Electronic Communication Networks (ECN) – Electronic communication networks are computerized order placement systems. Anyone can trade through ECNs, even hedge funds and 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.

The 4 digit codes you’ll probably see most often on your level II trading platform on a day to day basis are: NITE, ETRD, SCHB, TDCM and ARCA.

NITE = Wholesaler
SCHB = Wholesaler
TDCM = Retailer
ETRD = Retail ECN
ARCA = ECN

NITE dominates market making on the OTCBB. NITE is the most common ax (see blow what the ax means) on the OTCBB. NITE could be on the ask all the time and could be leading a dip scaring sellers to SCHB and TDCM on the bid.

Other ECNs: ARCA, BRUT, BTRD, INCA, INTL, ISLD, REDI

Wholesalers: ETRD, HRZG, MASH, NITE, SHWB

Big Shorters: JIMK, POND, GNET or ARCA (anyone can use GNET, even other MMs because it’s an ECN).

Market makers use Electronic Communication Networks (ECNs) to disguise their trading activities. These digital platforms facilitate direct trades between buyers and sellers, allowing market participants to execute orders without going through traditional exchanges.

By leveraging ECNs, market makers can blend in with a broad spectrum of users—including individual traders and large institutional investors. This diversity makes it challenging to determine the true nature of any particular order.

When a market maker places a large order through an ECN, the anonymity of the platform means that it’s unclear whether the order comes from a retail investor trying to make a small trade or a financial institution making a significant market move. Consequently, this method allows market makers to execute orders without revealing their strategies or intentions to competitors, thereby maintaining a competitive edge.

In essence, ECNs act as a veil, offering a layer of confidentiality that market makers can exploit to operate discreetly within the financial markets.

Market makers have some clever tactics up their sleeves for concealing order sizes in the trading world. One common approach is to use small, strategic orders that can be adjusted in real-time. When a portion of their order is fulfilled, they simply update it, effectively keeping their larger intentions under wraps.

This technique allows market makers to execute sizable buys or sells without alerting other traders to their true objectives. For example, displaying a manageable order of 10,000 shares tends to look less intimidating than a massive 500,000 share block. The key is to project the illusion of a smaller barrier, which doesn’t discourage other traders who might otherwise steer clear of a large, unappealing obstacle.

By maintaining this strategy, market makers skillfully manage to balance their trading goals while minimizing market impact and avoiding unnecessary attention from the trading community.

Understanding the Tricks and Deceptive Practices of Market Makers

Market makers often employ sneaky tactics to maintain control and unpredictability in stock trading. Here are some common strategies they use:

Concealing Order Sizes

One major trick involves disguising the true size of their orders. Instead of placing a massive order that could alert other traders, market makers might break it into smaller chunks. For instance, instead of showing a daunting 500,000 shares, they may display a consistent 10,000 share amount, making it seem manageable to other traders. This technique allows market makers to execute large trades without alarming the market.

Manipulation Through Order Size and Timing

Another deceptive tactic is manipulating order sizes and timing. Market makers may initially present a large offer to attract short sellers. Once these sellers take the bait, the market maker might withdraw the offer and replace it with a substantial bid. This swift change forces short sellers to cover their positions, often leading day traders to react quickly to the new large bid.

Using Electronic Communication Networks (ECNs)

Market makers also leverage ECNs to mask their actions. Since ECNs are accessible to everyone—from individual investors to large institutions—it’s challenging to discern who is behind significant orders. This anonymity allows market makers to trade large volumes undetected, further obfuscating their strategies from other market participants.

By understanding these practices, traders can better navigate the complexities of the market and remain vigilant against potential deception.

Understanding a Fill in Trading Orders

In the realm of trading, a “fill” refers to the successful execution of an order for buying or selling a security.

What Happens During a Fill?

When an order is filled, it means that the transaction has been completed at a specific price. However, not every order will be filled immediately or at all, as this depends on various conditions of the marketplace.

Types of Trading Orders

  • Market Orders: These are filled when the security reaches the best available current price. The goal is to execute the trade as quickly as possible, even if it means varying prices.
  • Limit Orders: These specify a particular price at which you want to buy or sell. The order is only filled if that price, or a better one, is available. This gives traders more control over the price but can result in the order not being filled if the market doesn’t hit the specified price.

Factors Influencing Fills

The likelihood and timing of a fill can depend on several factors, such as market volatility, liquidity, and the type of order placed. Hence, understanding the mechanism of fills is crucial for traders to strategize effectively and manage risks.

How Level 2 Data Helps Identify Price Areas of Interest

Level 2 data can be an invaluable tool for pinpointing crucial price areas, like support and resistance levels, for a stock. This data reveals the order book of a security, displaying various price levels at which traders are willing to buy or sell. Here’s how you can leverage Level 2 data for identifying these key price zones:

Spotting Large Orders

One of the primary methods is to look for unusually large orders at specific price points. For instance, if a stock typically trades in lots of 1,000 shares but suddenly there’s a large order for 100,000 shares at a certain price, this could signal potential support or resistance. Such significant orders often indicate strong buying or selling interest, establishing these levels as noteworthy.

Observational Caution

Be mindful that certain large orders may appear and then vanish as the stock approaches those price levels. This means relying solely on Level 2 data can sometimes be misleading. To counter this, it’s beneficial to combine it with analysis from technical charts, ensuring a more comprehensive assessment.

Validating with Technical Charts

Incorporating technical analysis with Level 2 data strengthens your strategy in identifying support and resistance. Technical charts can reinforce the levels observed on Level 2, providing a corroborative view. Look for patterns and historical data that align with the large orders you see in Level 2.

Utilizing Level 2 data alongside other analysis tools not only helps in identifying these critical price areas but also in making more informed trading decisions.

Limitations of Using Level 2 Data for Support and Resistance Levels

When utilizing Level 2 data to pinpoint support and resistance levels in stock trading, several limitations must be considered:

  1. Order Disappearance: A significant limitation is the potential for large orders to vanish unexpectedly. While Level 2 data can show a sizeable buy or sell order at a particular price point, this order may be withdrawn just as the stock price nears, rendering it unreliable for decision-making.
  2. False Signals: Not all data displayed reflect actual market intentions. Traders can place orders to create the illusion of strong support or resistance, only to cancel them later. Such manipulation can mislead investors, making it crucial not to solely base strategies on Level 2 insights.
  3. Lack of Corroboration: Level 2 data should not be used in isolation. To increase accuracy, these potential support and resistance levels should be confirmed with technical chart analysis. Charts provide historical data that can help verify whether price levels will hold.
  4. Market Dynamics: The stock market is subject to rapid changes, influenced by news events, economic indicators, and trader sentiments. Level 2 data snapshots may not fully capture these dynamics, leading to outdated or incomplete information.

While Level 2 data offers valuable insights, it is essential to combine it with other analytical tools and remain aware of its limitations to make informed trading decisions.

How Do Order Sizes and Timing Affect Trading Strategies?

Order sizes and timing play a crucial role in shaping trading strategies. Market participants often use these elements to influence market perception and movements. Here’s how:

  1. Influencing Market Perception: Traders can manipulate the market by appearing to build pressure in one direction. For instance, placing a large sell order might entice others to follow suit, creating the illusion of strong selling interest.
  2. Creating Volatility: By withdrawing or altering large orders suddenly, traders can cause rapid price changes. This volatility pressures other traders to act quickly, often leading them to make hasty decisions.
  3. Trapping Other Traders: Some traders use strategic timing to trap opponents. For example, they might place substantial sell orders to attract short sellers, then quickly switch to a buying position. This forces short positions to cover their trades, potentially driving the price up.
  4. Altering Supply and Demand Dynamics: Large orders can temporarily alter the apparent supply and demand. Traders watch these changes closely, adjusting their strategies to seize potential opportunities or avoid pitfalls.

Understanding how order sizes and timing impact trading is vital. Traders who grasp these tactics can navigate the market’s complexities and potentially improve their trading outcomes.

Understanding Short Sellers and Their Operations

A short seller engages in a trading strategy designed to profit from a decline in a stock’s price. This process begins when the trader decides to sell shares they do not currently own. To do this, they borrow shares from a brokerage, typically through a margin account, with the intent to sell them immediately in the market at the current price.

How Short Selling Works:

  1. Borrowing Shares: The short seller borrows shares from their broker. This is a temporary arrangement that comes with the obligation to return the same number of shares later.
  2. Selling at Market Price: These borrowed shares are then sold in the open market. The aim is to sell at a price that the short seller anticipates will fall.
  3. Repurchasing (Covering the Short): After the shares are sold, the short seller waits for the price to dip. If it does, they buy back the shares at the lower price, returning them to the broker and pocketing the difference as profit.

Short selling is inherently risky. If the stock’s price rises instead of falls, the short seller faces potentially unlimited losses, as there is no cap on how high a stock’s price can climb. This vulnerability makes it a strategy often reserved for experienced traders who confidently predict market downturns.

Frequently Asked Questions about Level II Trading

What is level 2 stock trading?

Level 2 stock trading is simply any trading strategy that relies heavily on level 2 market data.

Level 2 market data provides the following additional trading information:

Highest Bid Prices – The highest prices that traders are willing to pay to buy a contract (or share).

Bid Sizes – The number of contracts (or shares) that are available at each of the bid prices. When each of these number of contracts have been traded, the current bid price (included with level 1) will move down to the next level 2 bid price.

Lowest Ask Prices – The lowest prices that traders are willing to accept to sell a contract (or share).

Ask Sizes – The number of contracts (or shares) that are available at each of the ask prices. When this number of contracts have been traded, the current ask price (included with level 1) will move up to the next level 2 ask price.

Level 2 market data is also called the order book. When orders are placed, they are placed through many different market makers and other market participants. Level 2 will show you a list of the bids and asking prices from each of these market makers and other participants.

Here is what level 2 quotes look like in Etrade Pro:

Etrade level II quotes tool

Stockhaven posted an excellent video below called How to Use Level 2 While Trading Stocks – Tutorial on Level 2.

What are level 2 trades?

Level 2 trades are what replaced the older system of people having to shout on the floor of the exchange what they wanted to buy, or what they wanted to sell.

Level II quotes tool screenshot

The level 2 quotes window is nothing more than buyers (bid) and sellers (ask) shouting out the prices they want in order to make a trade.

QQQ level II quotes tool screenshot

Stockhaven posted the excellent video below called How to use Level 2 Live Trading video (on Etrade Pro).

What is level 2 trading data?

Level 2 trading data is the level 2 quote stream. Depending on your trading platform, you may only have level 1 trading data. Level 2 trading data usually costs more to receive. On Etrade Pro, level 2 trading data is included free if you make 30 trades (1 trade = buy, and 1 trade = sell) or 15 round trades per quarter.

What do level 2 quotes show?

Level 2 quotes show the highest bid price, bid size, lowest ask price, ask size, and market makers and other market participants.

Level 2 quotes tool in Etrade

The bid price is what buyers are willing to pay to buy a share. The bid size is the number of shares that are available at that bid price.

The ask price is what sellers are asking to sell a share. The ask size is the number of shares that are available for sale at that ask price.

The MMID is the Market Maker ID. It shows the 4 digit code assigned to Market Makers, Electronic Communication Networks (ECN), and wholesalers (order flow firms). In the image above, CBSX = the CBOE Stock Exchange, EDGA = the Direct Edge ECN, PHLX = the Philadelphia Stock Exchange, BOSX = the Boston Exchange, NSDQ = the Nasdaq Stock Market, Inc., BATY = Bats BYX Exchange, BATS = Bats Exchange, EDGX = EDGX Exchange, Inc., ARCA = Arca Exchange, and so on.

Understanding Buyouts in Trading

In the world of trading, a buyout occurs when an individual or a private equity firm purchases a majority stake in a company. This generally means obtaining more than 50% of the company’s shares or controlling interest, thereby giving the buyer significant influence over the company’s decisions and operations.

Types of Buyouts

  • Standard Buyout: Simply involves purchasing a majority interest using available funds or other financial resources.
  • Leveraged Buyout (LBO): This is a special type of buyout. Here, the buyer finances the acquisition primarily through borrowed money. The company’s assets often serve as collateral for the borrowed funds, aiming to increase returns on investment.

Key Points to Consider

  1. Control Transfer: The primary objective is to gain control over a company’s strategic direction.
  2. Financial Strategy: Buyouts can be part of broader financial strategies, including restructuring or improving company efficiency.
  3. Investment Opportunity: They provide an opportunity for investors to potentially generate substantial returns if the company’s value increases post-acquisition.

By purchasing a controlling interest, buyers aim to influence company policy and management practices, often shaping the company’s future trajectory to align with their strategic goals.

Level 2 Trading For Canadian Stock Exchanges

When exploring Level 2 trading on Canadian stock exchanges, market data can be viewed in several insightful ways. These different perspectives offer a comprehensive understanding of market dynamics:

Viewing Methods

  1. Price Aggregation
    • Market by Price: This method consolidates all orders from various brokers at the same price level into a single entry. It’s ideal for gauging the volume and interest at specific price points.
  2. Broker-Specific Data
    • Market by Broker: This view organizes the data by displaying each broker separately, showing all the price levels at which they have placed orders. It provides clarity on which brokers are driving market activity.
  3. Detailed Order Listings
    • Market by Order: This option details each individual order present in the market, sorted by bid or ask price, with every order appearing as a separate entry. It’s useful for scrutinizing the depth and specifics of the order book.

Subscription Levels

When you subscribe to a Level 2 data service for Canadian exchanges, the standard setting typically presents data using the market-by-price view. This foundational view can be enhanced by upgrading your subscription, allowing you to switch to either market-by-broker or market-by-order perspectives. This flexibility ensures that traders can access the level of detail they need for strategic decisions.

By choosing the right viewing method, traders can efficiently analyze market position, anticipate trends, and execute more informed trades.

Level 2 Trading: The Ax

The most significant market maker (MM) to look for is called “The Ax”. You will not see the MM identified as the ax so you need to watch the level 2 trades for a few days. The MM who dominates the price action is usually the ax. The reason some of the best day traders in the world want to determine who the ax is, is because they want to trade in the same direction as the ax because it will often result in more winning trades.

“The Ax” refers to the market maker or trader who has the most influence over the price action of a particular stock at any given time. This market maker controls a large number of shares, tends to dominate order flow, and often has inside knowledge or significant insight into the stock’s direction. Because of their ability to heavily influence price movements through their large buy or sell orders, traders often watch “The Ax” closely, especially when using Level 2 trading platforms.

Importance of “The Ax” for Stock Traders:

  1. Influence on Price Movements:
    “The Ax” can move the market for a particular stock due to their sheer volume and position. When they place large orders, it can signal significant price direction, giving traders a clue about short-term market trends.
  2. Order Flow Insight:
    By tracking “The Ax,” traders can gain insight into the order flow and liquidity of a stock. For instance, if the market maker consistently places large buy orders, it might signal an upward trend. Conversely, large sell orders might indicate downward pressure.
  3. Key Signals for Buying or Selling:
    Traders using Level 2 data can identify “The Ax” by observing which market maker consistently places orders at the best bid or ask prices. Following their actions allows traders to anticipate price changes and make more informed decisions.
  4. Level 2 Trading:
    Level 2 trading shows a depth of the market, displaying not just the best bid and ask prices but also the orders waiting behind those. Monitoring how “The Ax” interacts with this depth can help traders understand key support and resistance levels in real time.
  5. Market Sentiment:
    “The Ax” often reflects the market sentiment surrounding a stock. If this market maker is aggressively buying, it may indicate institutional interest or confidence in the stock, while aggressive selling might reflect caution.

In summary, watching “The Ax” gives traders critical insights into market dynamics, helping them make strategic decisions based on the behavior of the most influential participant in the stock at that moment. Level 2 trading data is particularly useful for identifying and tracking “The Ax” in real time.

Did You Know? Chartmill has a screener that often picks up market maker activity called large effective volume + pocket pivot screener. Check it out!

I’ve built upon this lesson for several years now. I really hope you make a lot of money from it. 🧡

Lance Jepsen
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