Understanding Level 2

[Lil]

You should perhaps print this page out......Unless you have a split screen to view the L2 chart below and read at the same time.

To understand L2, you will first need to know What a Market Maker (MM) is and what he does.

A market maker is a broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the market maker immediately sells from its own inventory or seeks an offsetting order. This process takes place in mere seconds.

http://www.pregnancy.org/photo/data/3411/532L2-med.jpg

the left side of the platform is the BID side (the prices each MM holds to buy from you, where you can sell)

The right side is the ASK side. The prices the MM's are asking you to buy it at.

Now at the tops of both you will see *inside* and *size*

The charts are color coated (I like alpha trade.com better for colors) the top or *inside* market maker is NITE (good to have him on the *inside* or I call it Top of the BID.(I'll explain that better later)
and you can see it says there is only one there (not good to only have one there, I'll explain that also later)

In the ASK column you have NITE also at the top of the ASK and only him there.

now in the next column's you have PERT on bothBID and ASK and just him again.

Now the next column you have 2 market makers on the BID and two on the ASK

This is what happens.

We said Nite was offering to buy our shares from us at .0095 (BID) and he is selling them to us for .0096 (ASK)
He is the only Market maker on the bid to buy shares from us at .0095 and when he's done getting all he wants....It will drop to the next MM, which is...PERT. and the best price you'll get for your stock will now be..... .0093 and so on.

Now you can see why you would want more MM's on the BID (BID SUPPORT). The more MM's you have on the *Inside* the longer it will take for the price to drop.

Now the ASK is the same thing. You have NITE On the ask, willing to sell you his shares for .0096.

Once he runs out of shares it goes up to the next MM, which is PERT.
He's selling them for .01, now if NITE only has 50,000 shares of this stock and someone buys these 50,000, NITE will leave (OR JUMP DOWN I CALL IT) and the next MM, which is PERT will move up and now....You're paying .01 for it.

So a good indication to get in quick is when there is only MM left at the top of the ASK cuz' the price is going to go up as soon as he is out of shares.


A good buying signal is Strong on the BID (lots of MM's on the top or first color or *Inside*....Whatever you want to call it. AND thin on the ASK......Only one MM left at the top, or color or *Inside*.....Meaning you'll have a lot of Market makers avialable to buy the stock so not too good of a chance of it going down any time soon but, the ask is thin so it should move up fast.

When you hear....There's only one left on the ask...It means, the MM at the top is almost out of shares and it's going to move up in price to the next MM.

Now the strongest MM's in the pennies are..(Usually)
NITE, ETRD, UBSS, HILL, PERT....


To see them on the bid is a good thing as they are strong MM's, it will take quite a lot of selling before the price drops..(again Usually)

Now to have them on the ASK is (usually)not fun.

So when you hear someone Getting pissy that NITE or USBB is on the ask......Or cheering that he is on the bid.....You'll know why.

I hope this helps and I didn't confuse you any further.