What is Level 2 Data?
Recent technology has allowed access to market information that was once available only to the Market Making community and to the Institutional world. The cost effectiveness of ADVFN's web based streaming application now means that the retail customer has a chance of operating on a level playing field with the 'professionals'. Our systems also provide a cost effective service for Broking and Institutional companies.

Each Level II screen gives you much more information than the traditional Level 1 screens (showing Bid/Offer/Volume etc.). The Level 1 information that most systems provide only show the bare essentials but fails to show how the prices are derived. For an active investor/trader it is essential to have as much depth of information as possible, which is where Level 2 differs.

Level 2 SEAQ screens are primarily a display screen showing the Market Marker(s) ID in the particular stock and their current bid and offer. Bid, bid size, offer, and offer size data. Level 2 SETS screens show the full order book ( i.e. all outstanding orders to buy and sell shares in the market.)

What Does The SEAQ/AIM Window Show

We will use Imagination Technologies Group as an example:

IMG The EPIC or Symbol (short code/name for the stock). This is a 3 or 4 digit code and is generally a derivative of its full name.

IMAGINTN.TECH This is the name of the stock.

Type of Share Quoted In this case its an Ordinary Share(ORD) issued at 10p

NMS 75,000 This is telling us that the normal market size (NMS) for this stock is 75,000 shares. It is calculated for every share in the market and is based on a percentage of that share's average daily customer turnover for the previous year. The percentage is intended to represent the normal institutional bargain. The percentage is set at 2.5 per cent. However, the NMS values of any security may be subject to change without prior notice. If we want to buy or sell more than NMS, we may have to buy or sell at worse prices than shown on the screen.

Segment SEAQ This displays the set of equities, which the selected share falls under on the London Stock Exchange. In this case it is SEAQ - Stock Exchange Automated Quotations system - the main set of equities traded on the London market. It is a continuously updated computer database containing price quotations and trade reports in UK securities. SEAQ International is the Stock Exchange Automated Quotations system for international equities.

Spread This is the difference between bid and offer, in this case it is 5p

Spread % is the percentage that the spread is, based on its current price, in this case 11.9%

Market Makers: shows the total number of market makers showing a price quote on this stock.

Total Trades is the total number of trades that have occurred so far today, there have been 11 .

Current Price (MID) 39.5: This is telling us what the current mid price is. This is based on the middle price between the current bid and offer. The colour denotes the current mid price compared with last night's close. Blue means up, Red means down and Green means no change.

-3.0 (-7.1%) This is a calculation based on the current mid price compared to yesterday's closing price for this particular share. The mid price is minus 3.0p, or -7.1% on the day so far.

Price Chg Last time the price changed was at 11:03

Flags  'A' Flag. An announcement has been made and will appear on the RNS
           news service. In this case there are no announcements showing.
           'X' Flag Indicating the stock has gone ex -dividend. In this case there is no X
           showing.

Open: 42.5 Mid Hi 42.5, Mid Lo 39.5. Today's opening price which can be the same as or higher or lower than last night's close. In this case it opened at the same as last nights close. The highest mid price today was 42.5p. The lowest mid price so far today is 39.5p, which is in fact 3p below last night's mid close.

Prev. Close 67.5 The previous day's closing price.

Trade Hi 44.0, Trade Lo 37.25 These can be dealt with together. The highest price traded so far for these shares today is 44.0p, the lowest is 37.25p.

Trades: 17 Total number of trades made so far today

Vol: Total number of shares that have traded so today is 471,035.

Trades Column: The top line of the trades list shows the most recent trades declared through the Stock Exchange.

Last Trade 37.25 Vol 2,400 Type of trade. O. Time of Trade 11:03:07
It shows the last trade that went through, it also has a trade code showing the type of trade O (see Trade Types).The trade took place at 11:03 and was a transaction involving a volume of 2,400 shares. It does not indicate whether this trade was a buy or a sell. However, if we had been watching the particular stock and the Bid/Offer was 37/42 at the time, it is a reasonable assumption that the trade was a sale of 2,400 shares. However if you click on Trades button at the top of the ADVFN page, the Trades Analyzer will come up on the screen, and will analysis it for you.

We now move onto the pricing information.

This is referred to as the "Yellow Strip" or "Touch" prices.

Buy Quotes column:
This shows the prices that the Market Makers are prepared to buy stock from you at. In other words a price that they will give you when you wish to sell your stock. In this case the best price is 37p which is from NMRA who will buy from you a quantity of stock up to 75,000 at this price. The next best price is also 37p which is quoted by WINS.

The yellow strip shows how many market makers quoting the best price (4) the size they will trade at (75,000) and the best price (37)

Sell Quotes column:
This shows the prices that the Market Makers are prepared to sell stock to you at. In other words a price that you will have to pay when you to buy. this stock. In this case the cheapest price is 42p which is from WINS who will sell you a quantity of stock up to 75,000 at this price of 42p. The next 3 offers are also at 42p, followed by KLWT who will sell at 43p.

The yellow strip shows how many market makers quoting the best price (4) the size they will trade at(75,000) and the best price (42)

What does the Order Book/SETS Screen show

GSK The EPIC or Symbol (short code/name for the stock). This is a 3 or 4 digit code and is generally a derivative of its full name.

Glaxosmithkline This is the name of the stock.

Type of Share Quoted In this case its an Ordinary Share(ORD) issued at 25p

NMS 100,000 This is telling us that the normal market size (NMS) for this stock is 100,000 shares. It is calculated for every share in the market and is based on a percentage of that share's average daily customer turnover for the previous year. The percentage is intended to represent the normal institutional bargain. The percentage is set at 2.5 per cent. However, the NMS values of any security may be subject to change without prior notice. If we want to buy or sell more than NMS, we may have to buy or sell at worse prices than shown on the screen.

Current price 1746 This is telling what the current price is - the current price is not calculated the same way as with SEAQ , which is a mid point calculation, the current price on SETS is based on the last AT trade, in this case the 2,600 trade at 1746p (14:45:43) The colour donates the current price compared with last night's close. Blue means up, Red means down and Green means no change.

+10 (+0.6%) This is a calculation based on the current price compared to yesterday's closing price for this particular share. The current price is an additional 10p, or +0.6% on the day so far.

Price Chg Last time the price changed was at 14:45

Flags  'A' Flag. An announcement has been made and will appear on the RNS
           news service. In this case there are no announcements showing.
           'X' Flag Indicating the stock has gone ex -dividend. In this case there is an
           XD showing, which means it is now Ex-dividend

Open: 1759.0 Hi 1761.0 Lo 1726.0. Today's opening price which can be the same as or higher or lower than last night's close. In this case it opened 5p lower than last nights close. The highest price today was 1761.0p. The lowest price so far today is 1726.0p.

Mid A calculation based on the middle price between bid and offer

Prev. Close 1736.0 The previous day's closing price.

Trade Hi 1763.52 Trade Lo 1726.0 These can be dealt with together. The highest price traded so far for these shares today is1763.52, the lowest is 1726.0.

Trades: 2,155 Total number of trades made so far today

Vol: Total number of shares that have traded so today is 7,686,046.

Trades Column: The top line of the trades list shows the most recent trades declared through the Stock Exchange.

Last Trade 1746 Vol 2,600 Type of trade. AT. Time of Trade 14:45:43
It shows the last trade that went through, it also has a trade code showing the type of trade AT (see Trade Types).The trade took place at 14:45 and was a transaction involving a volume of 2,600 shares. This trade will set the current price.

We now move onto the pricing information.

Above the yellow strip :

Buy Volume 645,847 This is a total volume or number of shares advertised as 'buy' orders in the left column.

Depth 56 Total number of individual orders in the 'buy' column.

Avg Size 11,532 Buy volume divided by Depth.

Sell Volume 601,702 This is a total volume or number of shares advertised as 'sell' orders in the left column.

Depth 154 Total number of individual orders in the 'sell' column.

Avg Size 3,907 Sell volume divided by Depth.

The "Yellow Strip" or "Touch" prices, shows very different information than on the SEAQ screen:

1 (L)and 3 (R) Number of buy and sell orders at the best price. In this case its actually 1 on the 'buy' (left side) and 3 on the 'sell' side (right side).

9,661 (L) and 62,482 (R) Total Volume at best price. 9,661 are available on the 'buy' side and 62,482 are available on the 'sell' side.

1746-1747 Best prices: the best price for a specific security, determined by the current orders on the order book. So the best available price if you wanted to execute a sale to a 'buyer' ( left side ) would be 1746. If you were a buyer the best or cheapest price you would pay is 1747 from a 'seller'.

The Order Book

The columns are made up as follows.

The left hand column, in this case starting with 9,661 @1746 is the best price 'published' on the buy side by a broker. It shows that a buyer wishes to acquire 9,661 shares at 1746p. Below him are other buyers wishing to buy different quantities at a lower price.

The right hand column, in this case starting with 40,000 @1747 is the best price 'published' on the sell side by a broker. It shows that a seller wishes to sell 40,000 shares at 1747p. Below him are other sellers wishing to sell different quantities at a higher price.

If you were a buyer you have 2 options. Either buy from the existing price screen at 1747, and match up with the published sellers in a quantity of 62,482 or less, or publish your own price on the left hand column hoping that a seller will match up with you.

If you were a seller again you have 2 options. Either sell to the existing price screen at 1746, and match up with the published buyers in a quantity of up to 9,661 or less, or publish your own price on the right hand column hoping that a buyer will match up with you.

The two columns are constantly changing as either a posted trade gets matched or indeed when someone posts up a new trade.

So what will change the yellow strip? The Yellow strip is just the best prices from each column displayed and is the price you will see on Level 1 screen (bid/offer). As the top price in each column changes so does the yellow strip price. So, say a seller came in and sold over 9,661 shares at 1746 to the advertised buyers, that price would disappear from the screen and the next price would move to the top (25,000 at 1745), which would mean that the Bid/Offer would now show 1745 - 1747.

The other way the Bid /offer can change is when someone post a new best price. It might be the case that a buyer comes in and publishes a price of 1747 in the left column. If this is the case then the bid/offer becomes 1747/1747. Likewise the same applies if trades are filled or new ones entered on the right hand column Because of the volume of shares traded in FTSE 100/250 stocks you can now see why the prices move so much within a day.

Trading Tactics Using Level II

The decision to switch to an order-driven trading system was taken in 1997 and SETS (Stock Exchange Electronic Trading Services) has changed the way FTSE 100 and many FTSE 250 stocks are traded in London. AIM stocks also sometimes show order book on a mixed SEAQ/SETS screen called SEATS.

Instead of agreeing to trade at a price set by a Market Maker, prospective buyers and sellers can advertise through their broker the price at which they would like to deal, and then wait for the market to move in their favour or execute immediately at the best price currently available.

The order book automates the process of dealing in equities - first by matching orders to buy and sell shares, and then by executing them to create trades. Though being able to see the order book is available to ADVFN users, only LSE members can actually enter the orders direct.

The trading day for SETS securities runs from 8.00 hours to 16.30 hours on each Stock Exchange business day, subject to a random opening and closing adjustment. The opening of the market is preceded by an opening auction during which time brokers can enter certain types of orders for execution during an uncrossing, which starts the trading day. The trading day ends with a similar auction pre 16.30 hours.

Auctions may also take place during the trading day, triggered by substantial price movements in a security

The Opening Auction

Between 07.50 and a random time between 08.00 and 08.00.30, there will be called an auction period during which time, limit and market orders are entered and deleted on the order book. No order execution takes place during this period so it is possible that the order book will become crossed. This means that some buy and sell orders may be at the same price and some buy orders may be at higher prices than some sell orders.

At the end of the random start period, the order book is frozen temporarily and an order matching algorithm is run. This calculates the price at which the maximum volume of shares in each security can be traded. All orders that can be executed at this price will be filled automatically, subject to price and priorities. No additional orders can be added or deleted until the auction matching process has been completed.

The opening price for each stock will be either a 'UT' price or, in the event that there are no transactions resulting form the auction, then the first 'AT' trade will be used.

The Closing Auction

The VWAP period (1) commences at 16:20 and lasts for 10 minutes. The closing auction call (2) commences at 16:30 and lasts for five minutes, plus a random end time of up to 30 seconds. The system then determines whether a matching price can be calculated for each SETS security. Five scenarios are possible (3a-3e). Extensions may be invoked depending on whether market orders are left unexecuted or if the potential uncrossing price is outside the price monitoring tolerance (based upon the 10 minute VWAP reference price). Up to two extensions per security are allowed - one market order extension and one price monitoring extension. If at the end of the auction call (including extensions) the potential uncrossing price is still outside the price monitoring tolerance, then a volume check is performed, based on half the Normal Market Size of each security (or a minimum 2500 shares). If the auction match volume is sufficient the matching price will form the closing price, otherwise the VWAP, or if there are no trades in the VWAP period then the last AT forms the closing price.

Dealing through SETS

An investor wishing to deal through SETS will contact their broker (by phone or on-line) and agree a price at which they are prepared to buy or sell a particular stock. The broker will enter the order directly onto the order book, and it will be displayed anonymously to the market alongside other orders.

In the example above of Glaxosmithkline an investor Mr Bloggs wishes to sell 1500 shares immediately, at the best price available. At the time the best 'buy' order available is for 2,500 shares (left hand column) at 1761p. The 'sell' order for 1500 shares will automatically trade against this 'buy' order- leaving 1,000 shares at 1761p on the order book.

Conversely if Mr Bloggs was a buyer of 2,500 shares at 'best', the price he would pay is 1763p, and his 2500 shares would come from the 'sell' order in the market of 7,431(Right hand column).

Alternatively Mr Bloggs might like to squeeze a little bit more money for his stock, in which case he can get his broker to 'advertise' for him on the order book. He might think that as the stock is moving up he might put a high sale price figure in hoping to make more money, lets say he is either a bit greedy or is prepared to wait for the price to rise and wants 1779p. In this example his broker would then post his 'sell' order in the right hand column . Conversely he might be a buyer but wants to buy at a discount 2,500 shares at 1754p, so his broker enters the trade on the 'buy' column (left column) and it would show up in this case as the third order.

A Background to the Market and Market Makers

A Market Maker runs a 'shop' and you buy shares from him or sell them back to him.

The Market Makers act as retailers of shares and display their prices during working hours. The prices may vary (sometimes considerably) during the day, depending on a number of influences. For example, if holders of very large amounts of a share decide to sell (or a combination of a lot of holders of small amounts), then the Market Makers will reduce the price that they are prepared to pay for the share. The converse is true also; if there is a consistent and large enough demand for a share, then the Market Makers will increase the price. Market Makers make money from buying shares at a lower price to which they sell them. This is the bid/offer spread. The more actively a share is traded the more money a Market Maker makes.

It is often felt that the Market Makers manipulate the prices. "Market Manipulation" is an emotive term, and conjurers images of shady deals and exploitation. Market Makers are not elusive companies that appear then vanish overnight. Market Makers are duty bound to make a market and to meet the needs of those they are responsible, to this end they may try to influence the market.

Market Makers are however known to lower prices to "panic" investors into selling, sometimes called "shaking the tree"? Moving the price up, encourages sells, moving it down also encourage sell, hence also the term dead cat bounce when a Market Maker will mark a falling stock up to encourage buyers in thinking they have reached the bottom.

A good pricing system such as Level 2 will give you an indication which Market Makers are keenly priced. Your broker using the same systems as you now have can sometimes get a better price than those on the screen. This is because Market Makers compete with one another for business. When your broker calls the Market Maker he is giving them the opportunity to 'bid' for the business, the Market Maker may well improve on the price on offer via the screens. The Market Maker only makes money when they are buying and selling, so the Market Maker will prefer to see the business go through their books at a reduce margin than allow it to go to another Market Maker.

When you buy and sell shares in most circumstances (SEAQ/AIM) your broker has to go through a Market Maker. The Market Maker works for an institution that makes a market (will buy and sell) that particular stock. They provide the market with liquidity - i.e. there will always be a price you can sell your stock at, there will always be a price you can buy some stock at (unless the share is suspended).

Market Makers obviously have a degree of risk. If there is a flood of sellers, because the Market Maker's job is to provide liquidity, he has to buy those shares even though the rest of the market may want to sell. If the price continues to fall he could be left with a lot of stock on his hands that he paid considerably higher prices for than he can sell for now. And vice versa - if a share is rising sharply the Market Maker has to continue selling the stock to the buyers - he could end up "short" of stock. In this situation he has sold stock he has not got, to fulfill all the buy requests, and he has to buy this stock in to balance his books, but at higher prices and makes a loss.

The Market Makers are effectively in competition with each other. With the example of IMG above, why would a seller want to sell shares to UBSW at 380, when the seller can deal with MLSB or AITK and receive 385p per shares? If UBSW wants to purchase shares, the Market Maker has to raise its bid price. If Market Makers want to buy shares because they may think the stock is heading up or they are short of stock they have to raise their bid price if theirs is not the best bid on the screen. This can cause the spread to narrow. If Market Makers are keen to sell stock they may want to lower their offer price to tempt buyers in. If all Market Makers start moving their offer prices lower to tempt in buyers and offload stock, certain traders could view this as negative for the short term. If Market Makers need or want to take in more stock they will raise their bid prices - certain traders again could see this as a sign of a short-term upswing in prices.

If a Market Maker does not want to trade in the stock he is making a market in he may make his bid/ask spread so wide to discourage anyone to trade with him. If all the Market Makers do this the stock can become illiquid temporarily as no trades are going through - buyers do not want to buy, sellers do not want to sell their stock at what they envisage is a poor bid price.

The Magician

Magicians work by sleight of hand that distracts onlookers from the most important part of the trick. Have you seen the trick with a colouring book? First he will show you a 'book' with drawing outlines in black and white, then he will show you the same book with some pages coloured and then he will show you the book again with all the pages coloured.

Like magicians- who can't let the audience see how the trick is done- large equity traders, Fund Managers and Institutions often must hide their intentions, moving in and out of positions without signaling their plans to other market players. This is especially true of the Funds with highly visible roles such as Mutual Funds and Pension Plan managers whose moves are closely monitored and widely reported in the Financial Press.

Many Fund managers are now are now up with the best of the 'Magicians' often quietly entering or exiting large positions, distracting the market with signals in one sector or equity and appearing in a second one before anyone has realized what is going on. Such stealth is commonplace.

How do they achieve this? Some of them break up their trades into small orders and trade them direct through SETS or anonymous trading systems (Tradepoint).

In the SEAQ example of IMG the eight Market Makers all have prices which are quite close to each other. There are five Market Makers on the same spread of 385-395. One each at 383-393, 380-390 and one at 382-392. The interesting point is that they all have the same spread of 10p which is quite unusual as Market Makers tend to have different spreads. They are all quoting the same normal market size of 25x25 which shows that they are prepared to buy and sell the same quantity. It is quite often seen that these sizes will change and that they might be 20x25 or 25x20. If the sizes vary, it can be a signal as to the situation in the Market Makers books. A size of 20x25 generally means they have stock on their books as they are prepared to sell to you 25,000 shares but only buy from you only 20,000. Conversely a quote of 25x20 will show that they perhaps have a shortage of stock and are prepared to buy more from you than sell to you.

Why do Market Makers prices vary so much? In the example of IMG the actual spread of 10p is exactly the same for all Market Makers. And yet there is a differential in their pricing structure. Looking at the screen it would seem that the best company to buy from would be UBSW at 390 and yet they would be the worst company to sell through as you would only get 380. As a comparison the best person to sell through would be any one of the Market Makers on 385 and yet they are the most expensive to buy from. Often Market Makers move these prices around to deter and attract buyers. In UBSW's case they perhaps have existing high levels of stock and therefore are prepared to discount slightly their selling price to you to 390. They will deter sellers by keeping their price low at 380 hoping the sellers will go to another Market Maker. The other Market Makers on 385-395 could possibly have an opposite book with a shortage of shares and therefore they are trying to attract sellers to sell to them at 385, and by putting 395 to buy from are deterring buyers. This is obviously a generalization in this case, but this can be a useful tool to see what really is going on behind the scenes with Market Makers.

Market Makers will constantly change their prices, behind the scenes, and their movement in prices do not necessarily affect the bid /offer prices you see on your yellow strip. It is this movement behind the scenes that is useful information to an active buyer/seller who is able to gauge general sentiment and potential direction of the pricing prior to its actual physical movement on the yellow strip. On most stocks there are normally a "lead" Market Maker and often other Market Makers will tend to follow sheep like.

In the example of the SETS screens the very fact that a broker is able to post up a buying or selling price can lead to manipulation of the markets. And this is especially true around options expiry period when increased volatility is the norm and this, combined with a little bit of "sharp practice", can lead to way-out prices being posted at the top of the boards on very small quantities which can move the yellow strip substantially. The LSE does have a market-monitoring department, which does look constantly for unusual trade sizes or pricing.

Volatility is also especially high at times of demotion and promotion to the FTSE 100 indices when many companies are demoted and tracker funds therefore are forced to sell the underlying stock. For funds to dispose of such large lines of stock they generally tend to wait until the auction periods and this can lead to some very strange pricing action.

On the SETS screen it is also useful to follow the published volume sizes of each buy and sell in their columns. If there are a number of small volume buy and sells at the top of each column these can soon get taken out by a number of small buyers entering the market and therefore the prices can move substantially on small volumes. In the case of fund managers, many disguise their sizable positions by splitting their trades up into small quantities of 10,000, 25,000 etc. size trades.

This is only a very brief summary of some of the benefits of using Level 2 systems and ADVFN/Success Events will be holding evening seminars to help our customers further.

This is only a very brief summary of some of the benefits of using Level 2 systems and ADVFN/Success Events will be holding evening seminars to help our customers further. Click here for further details