Level 2 is a screen which shows you the entire market in a particular nasdaq stock at a given moment. The bids are on the left side, in descending order with the best bid at the top and going down from there. The asks are on the right side in descending order with the best (lowest) ask on down. It shows who the bidders/offerors are (which market makers or ECNs) and the amount they are willing to buy or sell at that price. That's it on a very basic level. Theoretically, if there are many bids at the best price, for instance, and only one or two asks at the best price, you could assume there is buying pressure and the stock will go up a level or two. Conversely, if there is only one best bid and twenty asks, one could assume the stock is heading down.
This is a very very simplistic explanation. There are many strategies used by the market makers to be deceptive, fake out the daytraders, and hide their intentions (which could be to buy or sell large amounts of stock for a client) on level 2. There are entire books written on the subject.
On Friday, though, at the end of the day, I used it to try and find a decent spot to pick up some Dell looking for a gap up Monday which, as David Walter has pointed out, happens a great percentage of the time with Dell. I was operating on the assumption that the 80 calls and puts were in play and the price would fluctuate around that number for the last hour of trading. There was a huge line of bids at 80 with a large amount of shares bid there. I was waiting to see if that would get taken out. When it did, the trick was to try and find a spot where the sellers would wear themselves out. I guessed around 79 3/4 because there wasn't much time left and put my bid in there on Island. When the first group at 79 3/4 came up, only about 2/3 of them hit, then some bids came in at 13/16 and 7/8 and it went up from there. If my 3/4 bid hadn't been hit, I'd have jumped in at 13/16 or 7/8 myself.
Anyway, that's it very superficially. A good resource for those interested is:
undergroundtrader.com |
