Can anyone explain Level 2?

[Jesse]

Any stock experts out here? I want learn how to read level 2 including order flow and market maker games.

Can anyone explain this concept to me? Thank you

[Soultrader]

I am no expert in trading stocks because I trade the index futures primarily... here's a couple things I know.

When watching level 2, you need to identify the key market makers. They are the big boys who play the particular stocks in and out on a daily basis.
The two biggest and market makers are probably Morgan and Goldman. These two names come up often in the pit as well.

Market makers usually play the spread. If they are bullish on a stock they will load up and vice versa on shorts. Their objective is to unload their inventory by the close at a profit, which is usually the average spread.

The Ax, is the big daddy for the particular stock. A short term technique you can use is to lean on the ax. The ax, whether it be Goldman or Morgan, trade in huge volume. If you see the ax holding the bid and buying shares creating short-term support, you can step in front of him to buy. In case you are wrong, you can dump it back to the ax who is standing firm on the bid.

Here's a brief list of market makers:

MSCO, GCSO, NITE, MASH, HRZG, SLKC, BEST, PWJC, SBSH, MLCO, etc...

Head fake:

A head fake occurs when the market maker is holding the bid or ask strongly and all of a sudden pulls out. For example, suppose Goldman is holding the bid of stock XYZ at $50.00 x $50.25 and all of a sudden drops his bid down to $49.50. This will create a short term panic and traders will start dumping their shares. Goldman on the other hand may have had decent size volume of shares to buy, and will accumulate cheaper shares as prices fall.

Market makers head fake to create a short-term panic situation faking out the weak hands and leading to a price reversal.

Let's say the ax needs to accumulate decent size shares. However, everytime he steps up on the bid with size all the other market makers and traders jump in front of him making it hard for the ax to buy cheap shares. This creates a problem for the ax. Usually what the ax will do is to disguise himself using an ECN such as INCA to show huge size on the ask. This will intimidate buyers as they see significant size on the ask comparable to the ax. This prevents prices from lifting and possibly sellers dumping their shares to the ax.

The ax may even show greater size on the ask using INCA and accumulate shares as sellers dump it to him. As soon as the ax is done accumulating, he will step off the ask through INCA causing another buying rush. Thus, he will sell the shares back to the buyers for a profit.

Spotting the ax:

Its relatively easy to spot the ax. Just observe your Level 2 screen for the market makers jumping around the bid and ask. In a downtrend, look for the market maker holding the bid. In an uptrend, look for the market maker holding the ask. He is probably the ax.

Identifying a short term price move:

Observe the ax. If he starts widening his spread on the bid and ask be alert. The moment he steps off the current bid to a lower bid, this can cause the stock to go lower. If he steps off the current ask to a higher ask, this can cause the stock to go higher.


This was just a brief explanation of market makers and the games they play. This topic is a popular topic among traders and I am sure there are plenty of books around on this. Make sure to check them as well. Best of trading,

Soultrader

[Jesse]

Thank you. Market makers are traders afterall.... is there information on the level of traders each firm hires?

In other words, are certain market makers better or well known than others?