Level 2 online trading
Each trader should know whether his or her platform is or is not a DAT. In conclusion, routing for all option trades should be done through a DAT platform so that slippage can be minimized. Disclaimer This newsletter is written for educational purposes only.
By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter.
Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission. Market makers are the broker-dealers that hold large quantities of stocks and are charged with maintaining market liquidity by filling third-party buy and sell orders using their own inventory.
In other words, L2 quotes are not just a ledger of all the completed trades. An individual L2 order will typically have three parts. The first number will be the number of shares the market maker is seeking to buy or sell. Typically, this number is divided by to simplify the order book, so an order size of 29 would represent 2, shares.
Popular stocks have dozens of market makers actively trading shares on any given day. Typically, an L2 quote screen will place active buy orders in one column and sell orders in another, sorting both columns by price. The single most important piece of information day traders get from L2 quotes is the order sizes putting pressure on both the bid and ask prices.
An L1 quote tells traders only what the best buy and sell offers are at any given time. However, L2 quotes tell traders how large those offers are and how many more orders are in line behind them after the first order is filled. In addition, by watching L2 quotes closely for several days, traders can identify which market makers s are dominating the trading action for a given stock.