Bruce,
Everything that I have read about L2 trading is either hogwash or super elementary. I have bought and read most of the books and combed the net. The latest piece of crap is Electronic Daytraders series. Most authors are just trying to sell you their brokerage service, with Houtkin being the one to avoid the most.
It used to be that one could look at an L2 window and say "gee, 5 mms are on the bid and only 1 on the ask, this puppy is going to uptick." This is rarely the case anymore. A lot more ppl have L2 and the mms are acting accordingly.
One must also know the different mms and ecns and weigh their status accordingly (if ISLD alone is at the ask for 1000 shares, it is a true position. GSCO can be alone on the ask showing 1000 shares and sell 2 million shares, not budge, and cause the stock to tank. Even when they just upgraded their recommendation :).
Anymore it seems that public sentiment moves a stock much more than underlying financials. A lot more ppl are trading on their own behalf and not listening to the double talking, ass kissing annalists. Watching TOS and L2 for ECNs will give you a gauge for how much the public will move a stock, how many tiers, and in which direction. However,institutional blocks and interest must also be figured in but they almost always use a large mm. (sure,sure, I know institutions and mms can play games thru the ECNs, the main ones being INCA and the ones they are buying, but it would consume many pages to discuss the ramifications).
I think that a good book on L2 has never been published because it so intuitive. I have learned most of my lessons by watching L2 screens 6 1/2 hours a day for over three years ( i see L2 bars in my sleep). Again, I think that all of the books published are crap and cost a lot of rookies their trading capital. I wish someone would publish a real world book and make me eat my words.
Hope this helps a small bit,
Rod
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