When Level II quotes first came out, they were the rage. However, I rarely hear them talked about in the arena of trading anymore. I see them from time to time mentioned on other conference boards, usually by younger traders who believe they can see something (like an institution) trading a large block. I have found the Level II quotes useful in gauging the depth and amount of buying-selling. Just by glancing at it, I can tell on which side there is more pressure. However, I fool the level IIs all the time. On my trading system there is a "display size" option. The other day I sold 25000 shares but on the level II it appeared that I only had 100 shares up for sale. Anyone looking at the Level IIs and deciding which level to put their trade at that would have been fooled. Indeed, there were large trades placed 5 cents above mine. Unfortunately, the price of the stock never reached that point as I had exhausted the buyers five cents ahead of those guys sales. Its obvious that some institutions will play with the level II quotes trying to fool other traders into thinking a certain way. My question is are Level II quotes really a useful gauge to you? For myself, I use it as a general indicator of buying and selling pressure, however, I know that the Level II is highly manipulated and cannot be trusted 100%.
My recommendation is never trust the size which shows on level II. Most of time, it fakes people. They will switch side when they cumulate enough shares.
Very true. Here's an example. About 2 weeks ago PETS was trading in the mid 9's. For about 3 hours PETS range was literally 9.70-9.71. If you looked at level 2 during this entire time which I happen to do the amount of shares offered at 9.70 was never more than a few hundred shares, but there was probably 100,000 shares transacted if not more at this price range. Obviously someone placed a bid at 9.70 for a gizillion shares and only displayed 200 or so shares. Right know PETS is trading in the mid 10s. The floor brokers on the NYSE exchange do this all the time with their equote palm contraptions. They call them reserve orders.
Yep. I do it all the time too with the "display size" feature on my trading program. I usually sell thousands of shares all at once, but you will never see it on the Level II. It will appear that its a clear way up with all ones, but in fact you might add a few zeros to some of those 1s...