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Strategies & Market Trends : Level II Trading

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To: ExCane who wrote (141)	2/9/1998 10:23:00 PM
From: Jay Morrison	of 1086

What is the relation between market makers and SOES traders? Many people (here and elsewhere) are of the impression that market makers and SOES traders are mortal enemies and are chasing the same dollars at the expense of each other. I do not believe this is the case. Market makers make money by being at the bid and the ask all day long in a stock. You have all heard the term 'order flow'. You have all heard that market makers will buy 'order flow' from discount brokerages (Etrade, Waterhouse, etc) They buy this order flow so that they can make trades buying at the ask and selling at the bid. If the spread is 1/8 of a point, then the market makers are making $125 for every 1000 shares of 'order flow' they have. Wirehouses have their own order flow from their inhouse brokers. A market maker is perfectly content to have the market stay all day at 25 1/4 bid and 25 3/8 ask. As long as the volume is buying the ask and selling at the bid, they will make money all day long. A SOES trader is looking for stocks that are moving. The SOES trader and any other type of daytrader is looking for a stock that is moving, be it for any reason (news, earnings, etc) Using level II quotes (for a SOES trader), they can spot this trend developing and spot when it is ending. If you are quick and have the guts to pull the trigger, you can make money. But it takes a good eye and experience to follow this process. One must be able to watch a lot of numbers moving fast on the screen and understand what the entire picture means. Example to follow on next post.... Jay

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