50 50 5/8 10-10 RSSF so 50 1/2 10-4oPcO 50 5011/16 10-40 ALST 50 50 1/2 a5
NAWE 50 a 10-10 NQTM 650 60112 1010
10Upd | 2Diat | aTimesale | 4QkTS | SDwReq | GHsdiws | tSymb { 8NsdPhn |
 
   
 
 
i da CO Batt eso) Cl Re) Pt] 44.62.00 NGTM 1152 0WSOS; NOPD TESTA -OQUOTE CLOSED EXHAUSTED SOES EXPOSURE **** 11:52
 
As | gain insight into the market makers' limitations and constraints using thissoftware platform, | will post strategies and tips for exploiting thoseweaknesses to our advantage.
A quick example is the SOES tier size, the mm automatically fills your order at tiersize if you are first in line to buy/sell.
Weill look for other ways to “fight back" using our commercially available broker and3rd-party software tools, along with trading strategies.
If any of you are former or current market makers who have experience using NWIIwe'd sure like to hear your insights; we'll be sure to post them here to help others.Module Conprehensive Level 2 Wading Techniques: 4PREVIOUS NEXT~ Back toMODULE 2© Looking far *headfakes’, reversals & pivat points, recagnizing net buying vs. selling
In this lesson you will learn how to spot 3 key market maker (mm) trading actions to helpyour Level 2 daytrading become more effective. They include:
e HEADFAKES. MM initially buying to make the stock look aliractive as he gets short in theposition, then selling the stock down, covering at bottom. "Gap and trap" is an example Youbuy what looks to be a good stock, then the price drops abruptly, you sellin a panic and thenit goes back up.
« REVERSALS & PIVOT POINTS: When the current trend (either buying or selling) reversesitself....eg. sellers are done and buyers come inta play, or buying finished and selling starts.
« NET BUYING vs SELLING: Using the "number of times at best" feature and visuallywatching Level 2 action for major market makers to identify who is actually buying vs. selling{and how to tell when they are masking thier intentions).
Let's look at how each of these works, and how to profit frorn it:
Headtakes: ran |
Some of the medium-sized marker |RRRR_ + $4976 b 2458 0 34M/61%4 275K _ Ina j a
makers like HRZG SLKC etc. aremore prone to playing games thanare other market makers. Thelarger market makers tend not toplay garnes with bid/ask sizes.
Looking at RRRR here, you can HRZG 3414 1see on the one-minute chart thatthe stock was bid up starting at10am. Traders who bought this“second top" were in for a surpriseas HRZG sold it off down to thelow of day at 34. Yvhat's thestock's trading range? 34 to 35
 
34. Daytrader's Play: Buy off the low-of-day 2nd bottorn and short/sell at the secondtop, unless there's a breakthrough in either direction. Do not buy the second top ofWhat else would you look for to the day unless it's broken through (in this case | wouldn't have been a buyer until itidentify headfakes? The best broke through 36 on decent volume) Buying the second or third bottom off supportadvice | can give 1s to closely (in this case 34) would be a good play. Don't buy when it's choppy within the
follow 3-5 stocks onLevel2fora trading range, you will get shaker out. Pay close attention to the volume and othermonth or so each cay and get to TA indicators to confirm entries and exit points.
know the behamor of the different
market makers and ECN players Avoiding Headfakes: The steeper the price increase, the more likely a reversalonthe stack You'll soon learn who as traders who bought in low sell the stock for a profit. Avoid buying stocks thatthe real players are. Remember, to have run up in a vertical line until there's some kind of consolidation (sidewayssucceed In daylrading lakes alot trading holding in a pattern for 10-15 minutes}, then a continuation of an uptrend
of patience and concentration,
using the tools like the Especially avoid chatroom under-$10 stocks that run up on thin (less than 300Kprofessionals do. It amazes me to daily shares) trading yolurne
see the losing gambling behavior
af people in many of the On Level 2, watch for: fake volume sizes by mm's (eg HRZG posting 88 bid then lychatrooms who are clueless 45 t9 fading), flipping back and forlh from inside bid to ask, and mins fading back a
how to trade stocks. Poeple like spread at 4 time even when time and sales looks bullish These are warning signs
me and other professionals Scoop that ¢ reversal is ebout to occur.
their capital off the table with ease
REVERSALS & PIVOT POINTS: | ee P| ‘tTThese are my favorite plays, buying the |/SBUX - 247/46 b 24746 a 2494610x10 818K 1246
bottoms and knowing when to sell at thetop
Looking at the intraday chart for SBUXhere on 12/30, where is support andresistance? Can you see? Support at24 1/4 and resistance at 24 3/4. Aprofitable trading channel to play in
How does level 2 help you with this? Se
 
See how I've highlighted SBSH at 245/16 bid? Solly knows supportis at 1/4
an d will buy stock here, unless the s Bi (56Uxlfirteval Chan |market Sells off (in which case he'll lift Hfrrevstre: IBhis bid). But, SBUX is a slow moving SBUX + 242 b 24796 a 249166x10 823K 1248stock, he waits for itto come down to [MMI [Bid | a: Auth Ihis level to buy rt. Le. [| > | i ; \a |i i
Now see in the second chart how I'vehighlighted MLCO at 24 11/16? He | aiknows this is the initial resistance level, | | |and has parked hit sell ter order here i i '
r
Knowing how these two trading deskstrade SBU& is very profitable. Join theISLD bid at 24 5/16 then offer it out at
24 116 or 3/4 for a nice profit. Lco24ms 10 || Z
 
fers Falifivevvaichan TSNNow let's look at ETYS, a currentfavorite for bottorn-fishing (as of12/30/99) Where is support andresistance? Well, we can see supportat 25 1/2, and | highlighted GSCO asthe ax to follow with 4 thin size 2 bid at25 5/8. would place a stop loss in at25 3/8, as | see MLCO at 25 1/2 bid,and the stock has make 3 reversals at Cc rsaround 25 1/2. It's making lower highs,though, so I'd only play it for a scalp,joining the 25 5/8 ISLD bid here.
 Daytrader's Play: Reversals on higher volume and second bottoms/tops are key places to look for pivots and reversals.Knowing to follow the ax particularly at the places he puts his bids and asks will help you get better at determining likelypivot points and reversals. As always, use tight stops (under 3/3) to minimize losses if you're wrong. If the stock wigglesand heads in the direction you originally thought it would you can re-enter the position with a small lost trade potential (1/8max loss potential).
General level 2 reminder notes. watching time and sales as well as volume and overall market direction is important.
Remember not to trade during lunch in general (11 30-1:30 or so}, and know your stock's intraday market maker ax andsupportiresistance levels
NET BUYING vs. SELLING:
ove alfse= tone NIE Ov frieval cro: INE
Talk about a run! Look at NOVL here on12/30 going frorn 35 to 40 in the space ofan hour SBSH is the ex for NOVL and was al Ee‘on the inside bid all morning (a bullish jjsign). Joining him at 36 1/2 and selling atthe second shake near 38 is profitable
SBSH 39/4 10Now that he's on the second inside ask, I'dbe more cautious about buying and wouldlook to short the stock where he is offeringto sell it at (offer it out at 39 3/16 stopmarket buy/cover at 39 3/8)
 
Recognizing net buying vs selling is a trickybusiness, some software identifies the“number of times at best" bid/ask for thetrader; however this doesn't tell you thenumber of shares that were traded, numberof refreshes and size/order flowinformation.
Daytrader's Play: Once you spot net buying by the market maker you are following, join hisbid and stay with it until he flips. When SBSH flipped to the ask you know it's time to sell thisstock, as he has bid it up all morning and wants to lock in his profit at the current price level
Also be cautious of thin volume, eg here at 17-48pm it's the middle of lunch hour and you canexpect some selling down to a fibo retracernent level. In general, you should exit your morningpositians before lunch (or put in a trailing stop} to lock in your profit. Notice how volume has:
The best way to spot net selling vs thinned considerably from the morning runup period.
buying is to see the length of time the
market maker/stays]=t tire/Inside Looking at this level 2 chart, you also see sellers include heavyweights MSCO and SBSH, and
bidlask (eg if MSCO stays here selling at the green outside ask band is thicker than the green outside bid band. This is bearish. Buyers393/18, and the stock ticks down to 39x gre on thin levels and are mainly ecn players on ISLD/INCA. I'd sell ithere and waitto buy on a
39 1/8 and he still stays at 39 1/3 selling, isou'd call him a net seller). This depends breakout ae the high of day at 40 ‘4 or so.
you'd call him a net seller). This dependson the yolume of order flow being sold, ofcourse, I'd expect a mm to sell at least 8-15\ shares to call him the ‘ax’ in a stock
that trades more than 500K shares/day.
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Note: Market makers will frequently liftoff the inside bid/ask to mask theirorder flow, so keep an eye on theirbehavior in the green (1st outsidelevel} band as well. On the whole, arethey buying or selling, and have youidentified the "biggest player(s)" in thestock at the te you are watching?:Remember, the ‘ax’ will change, especiallyfor the most actively traded stocks
Also, be sure to know the difference
between ECNs (INCA ATTN ISLD
ARCA) and market makers (SBSH teMLCO MSCO GSCO).Module ©o i i ing Techniques;  @PREVOUS NEXTTwo
Back to
MODULE 2» How to spot the ax using Level 2
@ Main Points: Rk
In this lesson you will learn how to spot who the “ax" Is using a Level 2 screen. The “ax”\s the market maker who, at this particular moment (eg for this 3- to 15-minute timeframe)\s either buying or selling the most stock. We'll look at how to trade with the ax in the nextlesson; this lesson shows you how to spot who the ax Is.
« MM ECN Routing headfake: MMs will frequently disguise their intentions by routing their
orders through INCA or SLD. See through this ruse by determining how strong the buy/sellaction is on the inside bid/ask wINCA orISLD...2g if you see the inside ask stay firm wINCAor (SLD you know soma market maker is working a large order and that the situation is“indeterminate” or low-percentage to enter a trade Wait until a clearer signal is available toenter the rade
Spotting the ax on Level 2: As we've learned already, First atways keep an eye on MSCOMLCO SBSH and GSCO; these are your “first picks" ta see which of them are the ax atagiven point in time, The second indicator is the "number of tmas at best” inside bid/ask AND(more importantly) the refresh rate or ‘depth’ of their buying or selfing when they are at theinside (that's what T&S is for). A third indicator is the "trade box’ they are playing, eg whereis their bid/ask spread on level 2. A final indicator is the # of times they are at the first outside(green) band on level 2. This lesson cavers these four areas
Following the MM Axe to Daytrade: Even with the ECN routing that mms use to hide theirorder flow, there's still plenty of profitable trading to be had by correctly: #1) Avoiding buyingwhen a major mmiax is selling (eg if you see MSCO and MLCO both sitting on the inside askyou probably shouldn't buy if their bid is 3 levels outside the market) and #2) "Shadowing" athe ax's buying/selling behavior, if you see that all else looks okay, eg no suspiciously strongECN buying/selling on INCAVISLD.
Examples:
Four Ways to Spot the Ax on Level 2When the stock is not being moved
 
around primarily by daytraders onECNs {like DLCK is} or 4 mm routingorder flow through ECNs, considerfollowing one of these four main mmsas one of your primary indicators.
Let's study an example of NETA from,Thursday, January 6th, where MSCOis the ax.
Noticing unusual volurne at lunchtime,we see a trend reversal at12pm...BUY signal generated at 2341/2 here on volume pivot.
In the first box, | highlighted MLCQ,thinking he might be the ax. Hedropped out entirely though, leavingMSCO on the bid (2nd).
Third box, we see our initial scalpSELL signal as a volume spike at 243/8 followed by 4 lower high/lowerlow.
PIL = +7/8 points profitin an hourtrade. NETA went on to close at 2441/2. Nice ride.
MSCO is the axon this, we saw himstay on the inside (or 1 leveloutside/green) bid all the way up
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#2: Number of Times at Best (Inside) Bid/Ask
Ok, now we know who to look for, now let's look athow to interpret their position in the level 2 box.
This indicator is simply looking at the ratio of timesthe market maker you believe is the ‘ax’ is buying vsselling stock visibly on the inside bid or ask in &given time period
Let's say in the box to the right that I've beenwatching this stock for the last hour or so and SBSHkeeps popping up on the inside bid. Further, | see inTime and Sales that he buys at least 5000 shares ofstock in 200-1K trade sizes every time he's there.
Sure, he fades to an outside bid level now and then,but overall he's buying and let's say the stock isholding it's own (or even a slight uptrend) in a downmarket. I'd look to buy the stock when the marketstarts to head back up if SBSH is still on the insidebid.
Also, as a mental ‘checklist itern, at least do not goagainst one of the four major mm's who is refreshinghis bid/ask repeatedly Example | don't short SPLS.when MSCO is on the inside or green band, as hetends to hold SPLS up, and SPLS has up dayswhenever he's on the inside (at least the last 6
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We look at the Number of Times at Best (somesoftware will calculate/display this for you), to try anddetermine if this mm is a net buyer or seller
The caution, of course, is that they may try to appearto be buyers when they're really selling thru INCA orISLD.
One tip for this: Trade stocks with less skilled marketmakers on them. In choosing stocks to play, findones that trade on lower average daily volume {let's
 months of '99 to present) say 700K-2M, $25-$40 share price range), as theyare likely ta have a market maker dividing hisattention trading it and 4-5 other issuessirnultaneously. Heacfakes are more common withpopular stocks, as the major firms put their besttraders on them
#3: Ifarket Makers’ Trade Box
Looking at our NETA example again, you can see
MSCO's "trade box" is: NETA, Bl [pestMarket =] (P| TI NETA a [Interval Che
Bid 24 3/16 x Ask 24 1/2
for the moment This is a 5-spread trade box, Ls. aa
telling you he's not particularly bullish or bearish onthis stock publicly (again, watch ECN order flowfor disguised order routing)
MSCO 243/16 10Fy, trade boxes of 2-5 spreads are common,what you want to watch for is both the width of theax mms trade box (does he suddenly go from 3spreads wide to 6?), and the bid/ask direction ofwhere he's parking his trade volume. Thatis, is heA spreads wide but on the inside (say at 24 1/4bid NETA x 24 7/8 ask}. This can clue you in as tothe direction that this mm thinks the stock will goin.
 
Trading note. having a very intense focus is critical tosuccess in daytrading Make sure you know the behavior ofthe "4 major mms" for 3-5 stocks that you follow like theback of your hand. As you knows, | like NOVL SPLS DCLKSBUX for daytrading, there are many others out there.#4: Action in the First Outside (Green) Band
The first outside level in your L2 window isimportant to follow, it's kind of a ‘leading indicator DELL Rl cect ark
within the micro-world of the L2 box alone. Again, £} 1 osT&S and market / sector direction are the mostImpartant indicators, the L2 box 1s for closely
timing your trade entries and exits only (not overall [e- [a -
j
trend determination).
Think of the green band on the bid as your“escape hatch" for and the "wall of sellers to getthrough" on the ask 1.00
What do the two different examples here (to theright and below) tell you about relative buying andselling in these two stocks, DELL and YRTY?
 
Can you exit a trade more safely in DELL orVRTY, based on what the L2 green bands alone
are telling you? Daytrading Play wiGreen Band on L2° Use it to help you withscalping. | use itto decide if! should stap out of 2 position if
Answer is DELL of course, you haye 7 mms on buyers aren't coming in like | thought they would. If the green.
the green bid, only an ISLD 2 green on VRTY. band starts to evaporate, I'll sell at market bid 2-3 minutes
before the stock price starls to drop. Likewise, ifthe green askband starts to get thin, then | may enter 4 new long position inexpectation that the price will bounce up 2-3 spreads beforesettling in, at which point | may scalp out (frequent) or use atrailing stop for a 30-minute to 2-hour trade (10-20% of my
hk trades).
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VRIY c 3338 b 3318 o 33442x20 13.0M Deci7i8:23)
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Hopefully, these tips will help you become more cornfortable using Level 2 screens correctly. All of these subtleties arenecessary to daytrade for a living, yet no website or book I've seen tells you these important tips. hk
They should all make sense, there is much more to tell you about, let's press on to the next lesson... >>Module Comprehensive Level 2 Trading Techniques: @PREVIOUS NEXT»
Back toMODULE 2
« Trading with the lead axes: MSCO, GSCO. MLCO, SBSH
@ Main Points:
« Now that you've learned 4 ways to “spot the ax" on Level 2, let's look at how to make moneydaytrading by following the biggest and most powerful axes
« Trading with the major market makers is a relatively safe way to daytrade, once you know whatto look for and how to follow the signals.
« Ata minimum, you do not want to be on the wrong side of a trade when up against ary of thesefour mim's when they are selling (or buying) in size, and refresh their bidfask
« Atbest, you can be in front of their order flow and profit from a large order they are currently
working
« When they flip fron the bid to the ask you should prepare to exit your trace if you're long.
As the old traders’ saying goes, “Some days you Te fhe dog and olher days yout the hydrant”. Let'stry to be on the best side of that by leaming how to trade with the right buying and selling pressure
generated by the lead mmm axes.
Examples:
Play #1: Follow the Lone Wolf
Let us say that you arewatching this level 2 SBUXscreen. Of the 4 major marketmakers we'll be shadowing,which one appears here ontheinside bid or ask?
Ok answer is: GSCO, bid size10 at 27 5/3. On the time andsales you see a lot of sellinggoing on, and GSCN is buying.
How can you trace with this?First of all, consider all dangersignals: eg there's a pretty highnumber of sellers on instinet(INCA size 44), it could be anurnber of players in that pool of44, we need to watch the tapeto see if the 44 shrinks to lessthan 10 quickly (bullish), orstays strong. Remember 4 mmlike MLCO or SBSH or whoevercould be routing a big sell orderthru INCA The tape tells uswhat we need to know, for nowthere is a larger ratio of sellorders to buy orders on thetape, and no big blocks (12
 
Daytraders* Play: Let's assume you've heen watching for awhile and you seeGSCO has been at the inside bid (yellow) and is “holding up" the stock price at27 1/2 to 27 588, giving it support.
Even when a wave of sellers comes in (that you can see on Té.S}, the pncemomentum doesn't weaken, and the stock is recovering (you see frorn Level 2that the buyers aren't backing away, the color bands aren't getting thinner etc }.GSCO stays a buyer more than 70% of the time. He's not flipping over to theask much at all, and seems to be holding the stock up. You also see here thatGSCOU's "trade box" is bullish, he isn't even posting an ask 3-4 spreads up(unless he's faking via an ecn). Also, you don't see any of the other 3heavyweights selling openly at the ask no MLCO SBSH MSCG.selling at the bid, 5 paying the
ask). Still, so what GSCO will not make his intentions overly obvious, but your "feel" of the situation.is that he is a ouyer of the stock today and |s stronger than the sellers at thisparticular pointin time. So, you would buy stock where GSCO is, say enter alimit buy 1100 shares at 27 5/8, or, ifthe sellers at 27 11/16 start to quicklydisappear you enter a limit buy at the retail ask price of 27 11/16 ta get same.
When the stock price rolls up a spread to read 27 11/16 x 27 3/4, watch GSCOIf he stays at 27 5/8 or better after the price goes up a spread, you're in awinning trade. Trail stops 1/4 point down to lackin profit, and sell when you seeGSCO drop his bid by more than 4 spread, or when he flips over to the sel)side
Play #2: Samson and Goliath:MM ax vs. weak hands
Here's our NETA example SSS SS Oewith MSCO. Now, lets just Nera] fBestMerket =] PL oT] |
consider the 4 major mms
MSCO MLCO SBSH GSCO.Who 1s MSCO trading against? | e..| [a/RNobody, unless someone's Rite kam) |
selling a bunch through ISLD.(unlikely). BRUT and PWUC aresmall potatoes relative toMSCO
The next “strong player" isGSCO at 24 1/8 So, your tradeis relatively safe here, especiallywith volume reversal breakoutconfirmation on your 1-minutechart at right, and many trades Daytraders’ Play: Anytime you see a battle between one of the "big 4": MSCO MLCOgoing off at 24, the ask, in T&S. SBSH GSCO against an ECN order or chippies, you should probably start by assumingone of the big 4 will win, at least for a couple spreads’ worth of price movement. Watch theWhat do you do to buy ahead of T&S to confirm buying/selling direction, and be ready to exit if the mm flips over from bid
 
MSCO without paying up the to ask or yice versa. MLCO seems to flip the most, in the stocks | play. SBSH and GSCOspread? You can either enter a seem to be the most consistent of the 4, they don't seer to flip around as often
larger order than the best bid, eg
bid 1100 23 15/16, or split the Make sure to define your entry and exit strategy before trading as always, eg for a "I'mspread and bid 23 31/32 going to follow MSCO trade at 23 15/16 buy the bounce play" you might say to yourself "I'll(though if you're only tracing 500 have to be careful as it gets over 24, the high of the day is 25ish so Il plan on scalping itshares that's just $15, probably and selling when T&S starts to reverse, I'm expecting ta exit somewhere around 24 1/2."
not worth haggling over}So, you buy 1100 shares at 23 15/16, immediately offer it out at 24 1/8 to frontrun GSCOif you're scalping, or, sit on it and sell as your T&S shows other sellers coming in strong hyAgain, based on what MSCO Is doing; If he 1s holding it up and raises his bid as the pricemoves up |'d be less inclined to sell. If he immediately flips over to the ask, or if T&Sshows lots of people hitting the current bid, then you should exit the trade as well. Easy,right?
Play #3: Dueling Daytraders :oSome stocks are heavily traded bydaytraders, who haye a stronger impact on
the price momentum of the stock. Many AMZN - 9170 b 91702 a 92 10x27 10.5M 14:50internet stocks like DCLIK and AMZN fall CSCS eeinto this category, So you need to know fe] Lal
i
how to play these as well.
Daytraders frequently route through ECNs:like ISLDANCAVATTN/ARCA etc and soyou see a ton of trades going on here ‘Youdo not try to follow the ax in stocks thathave most of their orders going through onECNs, nor through stocks that have verythin bid/ask levels (eg frequently only have1-2 market participants at each level). Whynot? Vell, it's a pointiess strategy Lo followone of the big 4 if 80% of the trading isbeing routed through ECNs, right? In theexamiple to the right, let's see, you've got = Daytraders' Play: T&S looks bullish, L2 looks bearish
MLCO offering 3 spreads up, MASH (an (why, traders?). Indeterminate; | wouldn't know whether to
“almost-big’ mm}, wilh a 2 size twa buy or sell unti/ | savy the tape in action and could see the hkspreads down, nothing in other words you day's chart and other market indicators (like the $GIN
can follow inthe area ofa mm axto trade first, then the naz $COMPG chart, then $TRING/$TICK
 
with. It's an ECN play. etc)
So, you need to follow trade using the For now, it a "sit on the sidelines and watch" stock,crowd direction in these stocks even more based on what | see here. That's ok, | spend most of the30. Typicallly, these stocks sell off faster time watching, waiting for an opportune marment, thenthan others do, so are good "bottom bang | fire off the order, watch it go in my favor a spreadbounce" play candidates or short or 2 or 5, then sell. Or, if tweakens then I'm outta therecandidates. They sell off faster because fast, and get ready to "try again",
you have more panicked daytradersplaying them, and we exit at the first hint ofprice weakness in our stocks
NOTES on Following the big 4: MLCO SBSH MSCo GsCo
1. You are always looking for "lopsided" high-percentage situations to trace in Many new tradersovertrade, making for rich brokers and broke traders. Use a sensitive, practiced