Grindernote#2 – Level 2, Football match on steroid

Grindernotes will be small rough and ready posts that will be separate from the educational type articles that I hope to type in the future. They are off the cuff opinions, maybe a bit of a ramble. But if I want to get something off my chest then Grindernotes will be the place.

I have from time to time been asked whether it is worth subscribing to Level 2. I have also seen the same question asked on the ADVFN and LSE bulletin boards from the main high-risk penny stocks. One observation I have found over the years is that it is often those who have gambled their investment on a crap resources stock and the price has tumbled that then ask about Level 2. Bulletin board users often post that market makers are playing unfair games on the private investors. The ones who have not yet subscribed to Level 2 think they are missing out on vital information and are at some sort of disadvantage.

Let’s get one thing straight first of all. Level 2 is not the answer to your failure to invest properly. In fact, Level 1 will not even help you and it doesn’t matter what the suppliers of these live prices say.

88E Example – Home Win! (for about a few seconds – minutes – hours)

Below is a screenshot of 88E Level 2. This version of Level 2 is called SEAQ, a market maker quoted screen for these types of crappy penny shares that bulletin boards love. To me there are only two bits of useful information here. The Spread (Sprd %) shown on the little quote info table on the right. It’s a whopping 5.9%. So if you buy now you’re losing a whopping 5.9% to spread.

The second useful piece of information is the yellow bar. On the left (buy side) you see the number 3 and the number 900,000. That means that there are 3 market makers willing to buy off of you a total of 900,000 shares at the current price of 1.60p. (In the dark blue section below you see the three markets makers CNKS, PEELS & SCAP quoting 300,000 each). On the right side, (the sell side) of the yellow bar you see the number 1 and 300,000. This means that there is 1 market maker willing to sell you up to 300,000 shares at 1.70p. So in theory what this means is that there is a higher chance of the 1 market maker selling to you the 300,000 shares at 1.70p BEFORE the 3 market makers are able to find buyers for a total of 900,000 shares. So in theory, once the sell order of 300,000 is cleared the price will be quoted at the next price listed which is 1.75p. This is the second set of market makers (CFEP, WINS, SCAP) in the light blue section of the sell orders.

Ok still with me? That’s cool ok so the 300,000 shares at 1.70p has been sold and a new quote on the sell order of the yellow bar is now 1.75p, 300 000 and the number 3. The spread between the buy and sell price is now widened, so automatically the market makers on the buy side now will raise the price to (perhaps) 1.65p closing the spread again. What has happened is the mid-price of the stock has risen 5p to 1.70p.

Treating the yellow bar like a football match you can see that if the numbers on the yellow side are higher. It’s a home win.. meaning you are in luck. It is better to buy in NOW before the 300 00 sell order is cleared and you have a good chance the price will rise!

What a load of tosh it all is…
See the trades on the right side of the screenshot? There are past trades at 1 million, 500000, 200000 … some sells and some buys. All I can tell from this is that the yellow bar indicator is pretty damn useless since it seems that 900,000 or 300,000 shares can easily be bought or sold at any moment. There is absolutely no way to know in which direction the price is going to move. None, zilch, zero. Look at the times of the trades too. The quoted screen may only be valid for a few minutes before it changes. There is absolutely no advantage to watching this screen and even if there was, it is only valid for a few minutes. It cannot predict the future going on hours, days, weeks. To Level 2 has much use as a 5 minute chart. It’s all noise, gives us false signals and false confidence and just confuses the hell out of everyone.

Vodafone Level 2 – A football match on steroids.
Check out this short 30-second clip. It’s Vodafone level 2 in action. This type of level 2 is called SETS.

Which side will win!

I use Level 2 but very very rarely and only to check the most illiquid of stocks spread, check volume and if there is a huge gap on buy and sell orders. Then maybe, just maybe I may buy in. But in all honestly I feel even for me that it is a waste of money, I don’t need it and it is old technology that no longer gives any advantage to investors. It is such a short-term view that if I want to invest in an illiquid stock ill just buy in no matter what level 2 says. Even for traders who may put in a market order to hopefully find a buyer/seller within the spread, it isn’t the golden grail to make them rich.

Save the money on level 2 and instead subscribe to SharePad or Stockopedia and learn to improve your investing through fundamental analysis rather than waste it level 2.

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