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Understanding Level II Quotes Screen
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Understanding Level II Quotes Screen

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This document is intended to give the reader a detailed introduction to the Level 2 Screen and the different parts visible on the Level 2 quote screen

This document is intended to give the reader a detailed introduction to the Level 2 Screen and the different parts visible on the Level 2 quote screen

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  • 1. Understanding Level II Quotes Screen TRAINING MANUAL Ver 1.0
  • 2. Introduction This document is intended to give the reader a detailed introduction to the Level 2 Screen and the different parts visible on the Level 2 quote screen Level 2 Quotes The Level 2 Quote Screen allows the investor to see the depth of the market. Level II can provide enormous insight into a stock's price action. It can tell you what type of traders are buying or selling a stock, where the stock is likely to head in the near term, and much more. A typical Level 2 screen display is shown below Level I Quotes Level II Quotes Order Entry Section Level II is essentially the order book for Nasdaq stocks. When orders are placed, they are placed through many different market makers and other market participants. Note: Market makers are broker-dealer firms that stand ready to buy as well as sell the stock. Hence the market makers by definition ‘make’ the market in that they assure liquidity in the marketplace by standing to buy from the investor at the ask price, and by standing to sell to the investor at the bid price. By definition and law they are required to make both sides of the market (i.e both buy and sell). The market makers may or may not hold an inventory of stocks. The market makers make money off the bid/ask spread. Each market maker has a unique four-letter ID that appears on level II quotes called MMID. Some typical Market Maker MMIDs include GSCO Goldman Sachs MSCO Morgan Stanley LEHM Lehman Bros JPHQ JP Morgan Copyright © Prashant Ram All rights reserved This document may not be reproduced or distributed in part or whole without written consent of the author. 2
  • 3. etc. Orders coming in form the ECNs are displayed next to the respective ECN ids ARCAX ArcaECN BRUTBK Brut ECN INETBK Instinet etc Note: The market maker by definition has to make both sides of the market, meaning the market maker must have both a Bid quote as well as an Ask quote. The Level 2 screen shows a ranked list of the best bid and asks prices from each of these participants, giving you detailed insight into the price action. The Level 2 Screen is typically divided into 3 sections. The upper section gives the Level 1 Quote i.e. the best Bid/Ask on the stock. The Level 1 data also shows the OHLC (open, high, low, close) information, along with the Bid Volume (BVol) and Ask Volume (AVol), and total volume for the day. The middle section is the actual Level 2 quotes. This section may also have the time/sales window which displays the lots of stocks that actually traded. Ask Side: Bid Side: Increasing Increasing Prices Prices Time and Sales Window Ask Bid Side Side The Level 2 quote screen has the Bid Side (left side) and the Ask side (right side). Note that as you come up the bid side the Bid Prices keep increasing, with the best (highest) Copyright © Prashant Ram All rights reserved This document may not be reproduced or distributed in part or whole without written consent of the author. 3
  • 4. bid price on the top. Similarly, as you go down the Ask side the Ask price keeps increasing the best (lowest) Ask price is displayed on the top. Note: Bid is the price at which the investor can sell his stock to the market, Ask is the price at which an investor can buy the stock from the market. Thus as an investor the best Bid is the highest bid you can sell to in the market, and the best Ask is the lowest price at which you can buy from the market All the quotes belonging to a particular price range are displayed using a single color. The next best set of prices is displayed using a different color and so on. For example on the Bid side of the screen CSE, BSE, ASE all have Bid prices of 25.95 and so are all colored in yellow. NAS is the next best Bid price and so is in a different color. Correspondingly the next lower bid is 25.94 and the two market makers (CAES, ARCE) offering this price is colored in red. Note: There is no convention for the colors as long as all the MMID offering similar Bids (or Asks) are in the same color. Also, from the Level 2 screen you will notice that Market Makers make up both sides of the market. For example the Market maker CSE is Bidding at 25.95 and Asking at 25.97. The third section which is optional is the ‘Order Entry’ section, which an investor can use to place an order. The order entry section allows the investor to place different types of orders including market order, limit orders etc. The investor may also specify where he wants to route the order ARCA, INET etc. Copyright © Prashant Ram All rights reserved This document may not be reproduced or distributed in part or whole without written consent of the author. 4