I have a question about Level 2 with which I'm hoping more experienced traders can help me. In all the platforms I have access to (TOS, Lightspeed, eSignal, etc.), I always see ECNs like ARCA, EDGEX, BOSX, NYSE, or NSDQ consistently on the the best bid and offer. I see market makers like Goldman (GSCO) and Morgan Stanley (MSCO) listed far down on the bid and offer, far away from the market. Why don't I ever see these market makers at the BBO? Why are they always so far away from the inside mrket?
They don't have to be on the NBBO to trade with their clients because they control their order routing.
I'm not sure I understand. Can you explain this a bit more fully? Why would they be listed at all if they are NEVER the NBBO?
As ARCA members, they might have a reasonability to make markets, just not good ones. Being on the markets puts them at risk to other market makers and Algo traders. It might have to do with Dodd Frank. If they are trading for profit and taking risk, that might be some issue. But, if they are providing a serve to their clients it might be different. I don't understand the new law.
In addition to what 1245 says, this is my recollection from many years ago when I used L2. They can have a presence on L2, but choose not to be at the bid or offer during the times when you've observed. If memory serves me correctly, I do recall this type of situation; and every now and then, you'll see these types on the bid/offer. And even though they're not on the bid/offer, they still might be hitting bids/offers. Basically, it seems they have no obligation to maintain tight spreads; but they can bid/offer like any other trader when they choose to. A thorough search of the internet would probably yield more information.
It is more likely that they are buying on the bid and selling on the offer to whom ever they provide markets to, often for payment.
But if this were the case, then they would be seen on L2 at the bid and offer. I'm addressing the case the OP explained...that they are 'never' seen on the bid or offer.
They only have to be on the NBBO for public orders. If the orders are being directed to them or through their order router, they can trade with those orders without doing that on some ECNs, sometimes they only have to offer a small price improvement.
Guys. Thanks. This is a huge help. I think this helps explain it a bit. I really appreciate your taking the time to respond! Much, much appreciated!