PartyTime, I find NASDAQ Level 2 an essential tool when day-trading NASDAQ stocks. But, frankly, if you are not day-trading, it is not necessary.
I also think that if you come to the game with the paranoid approach of the RB poster you pointed to, you can only lose the game. Why play a game that you think is rigged?
Your RB poster is also woefully informed. You should take this in account when reading what he says.
For example, he suggests that HRZG often plays a game "absorbing all the shares they can".
In fact, HRZG is one of a handfull of high-volume retail MMs. (NITE is the largest of these.) These are the firms that pay retail brokers - and particularly these days, online retail brokers - for order flow, and execute the bulk of their trades.
You can consider NITE and HRZG (along with the ISLD ECN) to be a good proxy for "the public". When you see them in the market, they are there BECAUSE THEY HAVE CUSTOMER ORDERS IN HAND.
NITE and HRZG represent customer orders to the market. How do I know this? Because my broker (Preferred Capital Markets) routes all of their "$7.75" NASDAQ orders through NITE. In fact, I do MOST of my NASDAQ trades through NITE, because I find that usually (but not always) they do a better job for me than Preferred's "auto trade" choice. (I also occasionally use SelectNet orders.)
Anyway, let's take a slow market, where you can see just what is going on. Let's say ABCD is 10 x 10 1/4. I'd like to buy 700 shares, but I am cheap, and would like to do better than 10 1/4. So, I place a "$7.75" limit order for 700 shares of ABCD at 10 1/8. Almost immediately, I see my bid on L2 - "NITE 700".
WHOA NELLY! I AM THE EVIL MARKET MAKER! I AM THE EVIL MARKET-MAKER, SUCKING-UP ALL THE SHARES!
Me and 500 other day-traders and retail investors, that is!
It's OK, PT, there are some people out there more ill-informed than this guy. Once had a guy claim that INCA was the evil MM sucking up all the shares...
You see, it is important to know the various MMs - how they act. But it also important to know WHY they act the way they do. Are they a big bulk retail dealer like NITE or HRZG? An old-line brokerage firm with high-worth individual customers? An investment banker, taking positions for their own account? It's important to know the difference. Your poster got it wrong. He doesn't understand the roles of the various MMs.
If you want to learn how to use L2, my advice to you is to ignore paranoid rantings like this, and get a good book. You might consider "Electronic Day Trading Made Easy" by Misha T. Sarkovich. It's very nicely illustrated, and shows all the essential techniques of interpreting L2 data. It also includes a nice appendix on using CyberTrader (just bought by Schwab). Although I don't use CyberTrader, I found it interesting, because it talks about all the different ways an order might be routed (if you have the choice, as you do in varying degrees with various brokers).
What you won't find in this book are paranoid theories about MMs. You see, the pros use L2 to provide clues to price direction and timing, not to further re-enforce paranoid theories.
If you don't find this book to your taste, take a cruise on Amazon, and pick up one of the many other excellent day-trading books available. Check that the publication date is no older than 1999, as this information becomes rapidly dated. Any of them will provide a more informed approach to L2 than you are going to find in paranoid rantings.
Finally, let me add this: far from the paranoid view of your RB pal, I consider the MM to be my friend and partner in the market. NITE, (and occasionally HRZG, when for one reason or another my broker switches over to them) does my bidding for me (literally). They have snatched me shares when I was sure I wouldn't get them. They have held marketable orders, rather than just buying at the bid or selling at the ask, when they felt I could get a better price (and have done so, much of the time). When it is justified, they play coy for me, only showing 100 shares of a 2000-share order. (and perhaps selling out a position that would have otherwise moved the market). And, I have learned, on the rare occasions when they are stingy and I curse them for not being able to get me in and out of positions (they will, say, give me 100 shares and then walk away) I have found that it is a clue - it almost always turns out to be an ugly day like last Thursday. I am learning to take these clues from them! :)
Good luck, PT! |
