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Is Level 2 Data Still Worth It?

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I have been reading some mixed information about level 2 data recently and was wondering if it was still as important for day trading as it seemed to be a couple of years ago?

 

From my reading I have gathered that around the mid 1990s there were strategies for people to trade based on level 2 data because most people didn't have it at the time. Then as the year 2000 came around those strategies became obsolete because more and more people were able to access real time level 2 data but it was still a necessity for NASDAQ day trading because it would show you where the big institutions were headed. Fast forward to the present and I am reading articles that give conflicting advice toward level 2. Some say it is still a necessity and some say because of the strategies of the bigger institutions to mask their orders level 2 is useless nowadays.

 

As someone just starting out all this conflicting data is a little confusing to me and I was wondering if anyone could chime in that day trades NASDAQ and tell me their opinion.

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If you are talking about stocks then Level II was great until decimalisation where any real advantage to trade between the Bid and Ask disappeared. I used to use it extensively but soon learned that it was only of real use to reduce risk specifically at market entry. The strategies I now use are not dependent on that any more and as such I don't use it at all now. Most of the people I know who used it have now moved away from it.

 

 

Paul

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I think its started in the late 80's but there was a wrinkle in order placing on the NASDAQ that utilised the Small Order Execution System (SOES). Essentially it was a system to preference the small lot (under 1000 from memory trader). It let you scalp with guaranteed fills. This lead to a bunch of traders they called "SOES Badndits". This was what spawned all the L2 'methods'. After the advantage to small lot traders was eliminated and ECN's proliferated (particularly those that allowed large traders to 'hide' there orders better) I think the advantage of using L2 was largely eroded. That's just my opinion though.

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Cool information Blowfish...

The only thing I can really see with the book that seems usefull is accumulated depth of market, just to make sure your not entering in on the wrong side of a stacked book. I haven't done much there but I would think because of liquidity its part of the markets nature to trade to size at that level.

Even there though, I don't think we are fast enough at this level to deal with the book using anything other than tape reading techniques on the DOM. Even then, thats a whole lot of information/patterns to have to train your brain on and might do more harm than good for a very long time.

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Depth of market isn't what you think... even with tradestation I can make a 50,000 share order look like 500 shares.

Agree tape reading and smaller time frames (tick) are much more valuable.

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Depth of market isn't what you think... even with tradestation I can make a 50,000 share order look like 500 shares.

Agree tape reading and smaller time frames (tick) are much more valuable.

 

Actually, could you explain how you would do this? I don't quite understand the mechanics of how that would be possible. While I mostly sit in the camp that the order book should be treated as noise and ignored there is an interesting thread on elite trader about accumulating all 5 levels of the DOM on each side, building an indicator from it and using it for entry.

While it wouldn't be the meat of the trade or occur all the time I would think there would be some utility at a certain level of imbalance as far as getting better trade location on entry or picking up a few ticks at the exit.

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Its just a box on the order bar that says "show only" you can enter 666 if you like.

 

What you are talking about is far more complex, probably possible, possibly useful. Just observing the relative motion (or looking at the changes in bid/ask levels by the "tick") would be valuable, but the actual size of buyers/sellers is inevitably hidden.

 

Market profile will give you the most info in this respect, my opinion.

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I have been reading some mixed information about level 2 data recently and was wondering if it was still as important for day trading as it seemed to be a couple of years ago?

 

From my reading I have gathered that around the mid 1990s there were strategies for people to trade based on level 2 data because most people didn't have it at the time. Then as the year 2000 came around those strategies became obsolete because more and more people were able to access real time level 2 data but it was still a necessity for NASDAQ day trading because it would show you where the big institutions were headed. Fast forward to the present and I am reading articles that give conflicting advice toward level 2. Some say it is still a necessity and some say because of the strategies of the bigger institutions to mask their orders level 2 is useless nowadays.

 

As someone just starting out all this conflicting data is a little confusing to me and I was wondering if anyone could chime in that day trades NASDAQ and tell me their opinion.

 

Level 2 is still worth its weight in showing the games being played although the T&S gives the best window into supply and demand.

 

Most games comply with supply and demand on the tape. It is very useful when looking for an entry. The flipper got his name from playing these games on the DOM in favor of the overall S/D.

 

Good Luck

 

Advice:

 

Look at the T4 or TT DOM to get the both the level 2 and time and sales data, this way you see the full picture:)

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What do you mean when you said look at the T4 or TT DOM?

 

T4 by CTS and Trading Technologies Depth of Market Platforms. Both of these vendors offer great D.O.M. that show T&S on the DOM.

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Unfortunately TT DOM does not show sub-second T&S data. Very old releases showed them.

 

The edge with these DOMs is far greater than without, most break up the orders or do not show the T/S at all. If you need to see the HF trades I would recommend having it programmed and running it along side your DOM's, works pretty good.

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The edge with these DOMs is far greater than without, most break up the orders or do not show the T/S at all. If you need to see the HF trades I would recommend having it programmed and running it along side your DOM's, works pretty good.

 

"or do not show the T/S at all"

Hidden orders? You meant block trades?

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"or do not show the T/S at all"

Hidden orders? You meant block trades?

 

When I said they don't show it at all I meant they only show the quotes and nothing about time and sales. Others only show a 1 or a 2 by the traded price level as the transacted amount is broken down into ones and 2s (ninja trader)

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If you are a fast scalper then L2 data may help, i know of some traders who trade stocks only looking at the L2 data and not even the charts for quick scalps..its not of any use to swing and position traders..

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