NASDAQ marketplace has groups of market makers competing. Second,
there are several methods of viewing and executing in the NASDAQ
marketplace. This situation creates new challenges for the individual
investor. In order to trade a NASDAQ or over-tke-counter (OTe) issue
effectively, you need to be able to monitor the current market price, watch
the activity of the market makers, and determine both the depth of the
market and the trading momentum. To do so, you have to be able to view
the market. The NASDAQ exchange offers a firewall hierarchy of three
different levels of access for viewing the market and several methods of
trading.
NASDAQ Levels. With the explosion of online trading and day trading,
NASDAQ Level II has become a household word. Many individuals
do not understand what it is, but they feel that they need it in order to
make money in the marketplace. Remember that data is only information,
and you still need knowledge in order to analyze the data.
Level I. NASDAQ Level I provides the viewer with a composite of the
highest bid and the lowest offer among the market makers. These figures
are also referred to as the quote or inside market. This technique is the
most common method of viewing a NASDAQ stock quote. All investors
have access to Level I quotes. Level I quotes are free (if delayed) and can
be viewed at variousWeb sites. When your broker gives you a quote over
the phone, he or she is giving you a Level I quote. The chart in the Online
Quote section (earlier) is an example of a Level I quote.
Level II. NASDAQ Level II disseminates the names ofall ofthe market
makers and ECNs (ECNs are described later in this section) who make
bids and offers on a particular security. Level II is also known as "the
street." All professional traders, firms, and brokers use Level II to assess
the buyers and sellers, the momentum ofthe stock, and the depth and liquidity
of the market.
Recently; a number of online brokerage firms and data providers have
made Level II available to individual investors. Level II availability has
spurred the current growth ofday trading. For the first time in history, the
individual investor has both the capacity to see who is making the market
in a NASDAQ stock and the ability to execute an order directly with the
market makers. These practices are referred to in the individual retail
investor community as DAT or Electronic Direct-Access Trading (EDAT).
Reading Level IL NASDAQ Level III is the same as Level II. The
online retail community has used the term Level III to describe the mysterious
system that allows market makers to post their bids and offers to
trade in the NASDAQ arena. The NASDAQ Level III is actually the
Enterprise Wide Network (EWN II) system, which is the backbone of
NASDAQ. It is the world's largest closed network system (extranet)
designed by NASDAQ and MCI WorldCom. The system allows the market
makes to interface into the virtual world of NASDAQ. Retail customers
view a modified version of the EWN or Level III system through Level II.
The top line of the table represents the Level I (LI) quote, reflecting
the highest bid and the lowest offer (in the gray box across the top). Below
the gray box is a list offour-Ietter symbols representing the different market
makers and ECNs that are making bids and offers on the stock.
Currently, there are six bidders ofstock for 72 5/ 16 (the highest bid). On the
top line, INCA represents the Instinet ECN; and below that there are several
market makers who are also bidding for stock: BEST, SBSH, MLCO,
GSCO, and another ECN-REDI. There are seven sellers ofstock at 72 3/ 8:
ISLD, INCA, BRUT, REDI, BEST, DBKS, and ARCA. The colors help visu-
alize the depth of the marketplace. This layout helps you assess buying
and selling pressure by determining how many buyers and sellers there
are for a particular issue. The last column is the Time and Sales report,
which reflects all trading activity in that particular issue.
Read More: Executing NASDAQ Stock
