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But the process is never so orderly. |
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Because what makes the game exciting is this: At any time, a market maker can jump in ahead of others in line simply by being willing to offer a new best price to buy or sell the stock. Decisions about changes in price by market makers are made very quickly. Remember, this is all being done electronically. There is a lot of quick strategizing that goes on between them in jockeying for position to buy and sell. |
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Like a game of poker, players keep their electronic hands close tO their cyberchests, not wanting any of the others to know their moves until literally the last second. Also like poker, there is a certain amount of bluffing and "head fakes" that take place. All of this makes up the microworld of determining moment-to-moment prices. While crucial for the serious active trader, it is but a mere curiosity for long-term investors. They don't really care whether they pay a quarter point more or less, since they have a long-term perspective. |
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But even for online investors whose style is to buy and hold, it is fascinating and instructive to simply sit and watch a Level II screen to learn how electronic trading actually occurs. You may do this by visiting a day trading room in your area or by downloading a trial version of software (usually 15 minutes delayed) at web sites that offer it (for example, Tradescape.com). |
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I have found watching Level II data useful in deciphering some of the strategy employed by market makers. You begin to realize how these people are able to manipulate a stock up or down when it is to their advantage. And, of course, it is always to their advantage. |
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It is because of this perceived (and actual) power to manipulate stock prices that market makers have become the target of scorn and contempt by active traders and serious investors. This may be witnessed by reading a sample of the online bulletin board posts anytime a stock moves unpredictably for reasons that are largely unknown. The first and easiest target for blame are the market makers. Justified or not, in the stock trading world, they are the wretched group that everyone loves to hate. |
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When watching Level II, it takes a while to understand the flow patterns of a stock. But after days of close watching, you come away with a pretty clear picture of how things work on the NASDAQ market. You begin to be able to predict which way the market is going to move just by watching the action. This is a tremendous advantage compared to having no idea which way it is going with Level I data. And Level II is electronic trading at its most pure level. |
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