Let me relate to you what I think you are overlooking in your zeal that you have over the new Level II service. The important point here to understand is that MM is aware of what shows up as MM and ticker stats on Level II machines. Do not let the numbers fool you into believing you have more than you actually do. Just because you have numbers flashing at you does not mean you know what is actually behind them in terms of divining what the market maker is actually attempting to accomplish. Never forget that this is the most lucrative "poker game" you have ever and will ever participated in. This is where one MM can transact lets say $4 MM or more in stock within one *half* an hour. The certainly makes most everyone's stake here that they trade with look like peanuts. And when there is money at stake like this, you can count on that the MM will protect themselves and the interests of their clients. Some are just more agressive than others in how they accomplish this goal. Also I will say that it is obvious to me that it is not prudent to think this the Level II places you at par with the MM.
I think much of this will be obvious if you were to place yourself in the MMs position. Here you have as the primary tool what I call the "window" or the bid and ask and the spread between to use as a tool to keep yourself afloat and generate income on a reliable basis. Now how would you approach this in a given situation? Thinking this through from the position of the MM can provide insight into what is possible with the MM's operating practices. This is not complex to understand, even though I am sure it takes good experience to pull successful market making off in fast or changing market situations where at the end you have made your share of money. You also have other options at your disposal like that of shorting the stock, utilizing Instinet, and the use of the simple telephone to locate buyers and sellers and cross transactions. You also have access to the options MM of the firm you work for. For instance, do you think you will be able to "see" what is transpiring on the telephone between the MM and a client with your Level II screen? Of course not. Once the block is crossed, you see the print after the fact. Once this happens, it is too late.
The lowering of the bid at one time can mean something else at another time with the same MM. The significance of changes in bid and ask can also depend on if the MM is the "axe" in the stock you are tracking. You add to this picture the use of Instinet not only as a means of accumulating and selling shares, but also as a way of communicating (false) messages to the crowd, much indirection is possible through the MMs use of Instinet. I am sure other experienced individuals here can provide many detailed examples of what I am referring to. So in this way, the MM is playing the role of magician. Quite often what you se the market maker doing may mean the opposite of what you think they are attempting to do. Also, you may be only seeing the results and not able to connect it to how they executed their trades, such as my Instinet example. Without this knowledge, you can misinterpret the significance of what you are seeing on your Level II screen of MM activity.
Is this making any sense to anyone here? I am relating here what to me appears to be obvious, along with what I have learned about the NASDAQ market through my own experiences. But I have not used a Level II screen before. So I do not want to mislead anyone by implying that I have used Level II in my trading. But I think this topic about MM operating practices as it is reflected on Level II is not difficult to understand. Just place yourself in the shoes of the MM to get an idea of what is possible.
I gain the impression that this machine has allowed you to feel "in control" and give you "easy" access to profiting form the MM activity on a stock. This tells me that you are allowing your relatively new experience with Level II to distort your perspective. Think about this for one moment. If it was this easy, don't you think many including myself will be dropping what they are doing to aquire Level II and scalp the MM all day long for 1/8 and 1/4 of a point and inside of one year retire? I suspect you did not make any money in this way. So what is the point in this being "easy" to do? I actually do not think it is easy to do or even possible to do in a reliable fashion. Lets see, 1/8 on 5,000 shares which can amount to $100,000, gives you lets say $600. You were trading with at least 5,000 share purchases, weren't you? Not a very good profit to risk ratio here. Now subtract commissions at lets say $50 each way on those 5000 shares for a total of $100 in commissions. This leaves you $500 before taxes, or one half of one percent of the total equity you placed at stake. This is far from a "sure thing". And you did this 68 times in one day? IMO I would consider this not prudent, particularly since you are just learning the system. I suspect many of those attempts set you up with losses to compare to the trades of $500 in profit that you did succeed in executing. This is what can happen when you trade the intraday "noise" of a stock instead of trading for those one or two points price changes. The Level II screen definitely encourages this type of scalping with the newcomer. I have seen this happen before. It is a losing proposition.
So I hope you take the above as a friendly warning from a concerned individual who has seen others operate in the same fashion.
Bob Graham |
