Level II (DOM, Market Depth) is a book of orders to buy/sell stocks in NASDAQ system.
When traders place orders, they enter the market through a variety of market makers and other market participants. Level II is a queue of orders sorted by best BID and ASK prices (market depth) with market makers and ECN unveiled.

Level II provides info on types of traders who are buying or selling stocks on US market. That is why Level II is thought to be giving clues about the price direction.

There are 3 types of market participants in Level II:

Market Makers (MM) – these are the players providing liquidity. They are obliged to buy when there are no other buyers and sell when there are no other sellers on the market.

Electronic Communication Networks (ECN) is a computerized system of orders placement. Any market participants including big institutions can work through ECN.

Wholesalers. Many retail brokers sell a load of client’s orders to wholesalers, who execute these orders on exchange on behalf of retails brokers.

Every market participant has a unique four-unit code, e.g. JPHQ – JPMorgan

Market Maker codes:

AGIS Aegis Securities, Inc.

AXCS Access Securities, Inc.

BARD Robert Baird & Co., Inc.

BEST Bear, Stearns & Co., Inc.

BRAD JC Bradford & Co., Inc.

CANT Cantor Fitzgerald & Co., Inc.

CHIP Blue Chip Trading, LLC.

CIBC CIBC World Markets Corp.

COST Coastal Securities, LTD.

COWN SG Cowen Securities, Inc.

CWCO Crowell, Weedon & Co., Inc.

DBKS Deutsche Bank Securities, Inc.

DEAN Dean Witter Reynolds, Inc.

DKNY Dalton Kent Securities Group, Inc.

DLJP Donaldson, Lufkin & Jenrette, Inc.

FBCO Credit Suisse First Boston

FCAP First Union Capital Markets Corp.

FLTT Fleet Securities Corp.

GFIN Granite Financial Group, Inc.

GSCO Goldman, Sachs & Co.

HMQT Hambrecht & Quist, LLC.

HRZG Herzog, Heine, Geduld, Inc.

ITGI ITG, Inc.

JBOC JB Oxfrod & Company, Inc.

JEFF Jeffries & Company, Inc.

JOSE Josephthal Securities, Inc.

JPMS JP Morgan Securities, Inc.

KCMO Security Investment Company of KC

LEGG Legg Mason Wood Walker, Inc.

LEHM Lehman Brothers, Inc.

MADF Bernard L. Madoff, Inc.

MASH Mayer & Schweitzer, Inc.

MDLD McDonald & Co. Securities, Inc.

MLCO Merrill Lynch, Inc.

MONT Bank of America Securities, LLC.

MSCO Morgan Stanley & Co., Inc.

NEED Needham & Co., Inc.

NFSCV National Financial Services Corp.

NITE Knight Securities, Inc.

OLDE Olde Discount Corp.

PERT Pershing Trading Co., LP.

PIPR Piper Jaffray, Inc.

PRUS Prudential Securities, Inc.

PURE Pure Trading, Inc.

PWJC Paine Webber, Inc.

RAGN Ragen MacKenzie Inc.

RAJA Raymond James & Assoc., Inc.

RAMS Ramius Securities, LLC.

RBCD RBC Dominion Securities, LLC.

RSSF BancBoston Robertson Stephens, Inc.

SBSH Salomon Smith Barney, Inc.

SELZ ING Baring Furman Selz, LLC.

SHWD Sherwood Securities Corp.

SLKC Spear Leeds & Kellogg Capital Markets

SNDS Sands Brothers, Inc.

SNDV Soundview Technology Group, Inc.

SWCO Schroder Werthheim & Company, Inc.

SWST Southwest Securities, Inc

TUCK Tucker Anthony, Inc.

TWPT Thomas Weisel Partners, LLC.

WARR Warburg Dillon Read, Inc.

WEDB Wedbush Morgan Securities, Inc.

WEED Weeden & Company, LP.

WPCO Wasserstein Perella & Company, Inc.

Codes assigned to Electronic Communication Networks (ECN’s) and regional exchanges:

ARCA Archipelago ECN

EDGX – Direct Edge ECN

EDGA – Direct Edge ECN

BATS – BATS exchange

BYX – BATY exchange

NSDQ – NSDQ exchange

NSDQBX – NSDQBX exchange

PHLX – Philadelphia Stock Exchange

NSX – National Stock Exchange

AMEX – NYSEARCA Mkt

Why do traders use Level II?

It is thought that Level II provides additional info on what is going on with a stock. E.g. you can find out whether it’s bought by institutional or retail investors. It is also thought that you can define the end of a strong trend if you see the orders that are executed between BID and ASK, when big traders send market orders to make sure that their trade is open/closed.

But Level II can misinform you as well. Moreover, all too often you will be misinformed intentionally; market makers can hide order size using hidden orders. It is done in order not to frighten other traders with a big size. E.g. if 500k shares are placed for sale at once, other traders will hardly try to break through this level.

One more example: JPHQ wants to buy big size and places big order on ASK. This brings many short sellers who start to fill with orders on BID. JPHQ buys and makes stop orders of sellers executed; the price goes up.

Market makers can hide their activity when trading through ECN. ECN can be used by anyone, so it’s hard to say who placed a big order you see.

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