Bob,
Anyone thinking of playing this poker game would do well to be cautious, as you are suggesting. Any newbie who sits at the table thinking he has an advantage over the MMs is kidding himself. I have been taking a course the last few weeks, learning to use the ATTAIN system, similar to the Cybertrader system used by DRRISK. I don't claim to be an expert, but I am learning. I plunked down a whole lot of money for the privilege of learning the game from people who have been playing for awhile before I risked any money on this particular game. I consider it money well spent.
Level 2 by itself is not a complete picture of what is going on. It only shows what the market makers are willing to do with what is often only a small fraction of the money or stock they have at their disposal. SOES is a game they are forced to play by SEC rules if they wish to be a market maker in a stock. They are required to publish their bid and ask prices and give the public opportunity to execute at those prices. In return they still get the ADVANTAGE of being a market maker. Level 2 does not tell you how much stock they really want to sell or to buy. I think that when they have a customer order, they are supposed to display the entire order, but let's get real. You are right to think in terms of putting yourself in their position. If one of them has 100,000 shares of a stock to sell at say $40 (your $4MM), does anyone really think they are going to tell the world they have that much? Of course not! Everyone else would stop buying and start bidding for pieces at lower prices, knowing there was a motivated seller out there.
If you track level 2, but also pay attention to time and sales, or a custom ticker, you will often see numerous small (1000 or less, mostly SOES) transactions at the price being bid or asked by the MM while they sit there filling all the executions that come their way. That's where you find out if there are buyers or sellers in the game, not just from level 2. Large blocks that are not executed by SOES also have to be posted, but the MMs are allowed up to 90 sec delay in posting manual (e.g., telephone orders) transactions, which can be far too long if you are a momentum trader. When things get a little quiet, you often see the major players, even the "axe", moving their price out of the inside market. Maybe it's a lure to draw in the people they think are following them, or maybe they just do it once in a while to test the staying power of the other MMs. I have often seen them jump away for a few seconds, and then jump right back into the fray when they see other MMs holding up the inside market.
The bottom line is the MMs always have an advantage. Whether or not they abuse it is a separate issue. They have the advantage of the spread, and more importantly, the advantage of order flow. They KNOW whether they are buyers or sellers and how much stock they are trying to accumulate or sell off. In addition, they have a preferred status at the inside market over bids and offers posted on ECNs like INCA, ISLD, etc., which cannot be SOESed like the MMs, but must be preferenced to get an execution. Even with the best tools out there, the rest of us have to react to what we see the market doing, wait for an execution that may never come for our limit orders, even when they are at the inside market, and most of the time overcome the spread, as well as commissions, before we make a dime. If the MMs want to bluff and fake, so be it. It's part of the game. If you don't want to play this game, you can always try picking stocks, pay the current price, and wait for them to move.
Anyone who thinks they are coming to the table to beat the MMs is, I think, sadly mistaken. But there are other players in the game too. A lot more than there used to be, so the game is getting a lot harder. Any honest daytrader who made a bundle using SOES a few years back will admit that (and they do exist!! Some have retired or opened a SOES shop). Some players are still good enough to have a $3000 day now and then like DRRISK. Some, unfortunately, easily lose that much or more in a day. (DRRISK didn't tell us how much his ONE mistake cost him. Two or three mistakes can easily wipe out $3000 or more.)
Whether this game is any more risky than trying to pick good stocks to ride for a point or two, or to invest and hold, is an open question in my mind. I've been cleaned out by investment bankers who promised to look out for my interests and coaxed me into buying stocks that tanked, then left me holding the bag. I've used online systems with pseudo real time access and lost money because the systems were down when I needed quotes and execution. I'm not sure what kind of trader I will be in a few months, but whatever it is I want the best tools I can get when I make a trade. Level 2, reliable up to the second quotes and transaction histories, and near instantaneous executions when I want them are, in my opinion, mandatory if you are going to get out of this game with your shirt. |
