OnLine… or A Blind

Man’s Miracle

NASDAQ Level II
Trading Strategies
With Mike McMahon
To DAT and Back……..
• How we got here
• Synopsis of Trading History
• Online vs Direct Access
• Level II “nuts & bolts”
• Level II Reading
• Your Involvement and your Risks
• Summary
Progress …….
• We stood Face-to-Face
and Argued whether a
Wheel was worth 2 Clubs
Progress………..
• We stood Face-to-Face and Argued
whether
2 Pigs equaled a Bushel of Grain
Progress……..
Suddenly, it got formal

We could no longer
“see” each other

Somebody had to
exchange the pigs
for the clubs,
the clubs for the wheel
and the wheel for the
grain….

We wanted Bread!
 Progress…??
• Big Brokers
Stepped in to
Help US!
• We Lost Sight
What’s a broker? A Middleman.
What do Middlemen do?
They cost you
• Money
• Time
• Control
You can no longer
see what’s going on
with your trade
So…
We decided that:
• We can do it ALONE!
• We can do it better!
• We don’t need to share
OUR profits!
• Just Give US the Info
and a Computer!
A Vital Piece of Information……
• We got the Computer

• We got Level I

• We had the Info that

the Broker had

• Or Did WE ?!?
Welcome to bigbroker.com
Trading…….

• Faster Executions!
• The Best Fills!
• Real-Time Data!

• Who are we
Kidding!
Shortcomings or Short-Sighted
• How can you climb up out of
the Online rut?
• How can you trade face-to-face again?
• Is there a a Better Way?
ECN’s……….Vision Restored
• Electronic
Communication
Networks

•Incredible Trade Clearing

•Transparency into
the Market

•Allows you to Advertise!

•Allows you Negotiate!

ECN’s ….To “See” or to “Use”

• To “See”
– You only need $$$$….and the
window opens
• To “Use”
– A Direct Access Broker…who will help
you onto the Hwy of DAT
– CyBerTrader, Tradescape, TradePortal, RealTick,
On-Site, Momentum, GroTrade, A.B. Watley, and
others
Who Is that MASKED MAN…..?
• ISLD Island - Datek
• INCA InstiNet
• ARCA Archipelago - Terra Nova Sec.
• ATTN All-Tech Invest.
• BTRD Bloomberg
• BRUT Brass Utility (+ Strike 5/00)
• REDI Speer, Leads, Kellogg
• NTRD Nex-Trade
• MKXT Market XT (Joined 4/00)
The Other Players…Market Makers
• Firms that Make a Market
– On Bid & Ask at all times
• Major Players You should know
– Goldman Sachs = GSCO
– Merrill Lynch = MLCO
– Morgan Stanley = MSCO
– JP Morgan = JPMS
• These are just a few that represent
different areas
• NASD.Com and NASDAQ Trader.com
 ECN’s

•Better Prices !

•Narrower
Spreads!

•Direct Access
Level I vs Level II

The New Tools

of the Trade
Level I
Your Level I may look like this:

But “What” do You Know?

• “Who’s Buying, Who’s Selling?”
• “How Much, How Often?”
Level II
Now you “See”

Who’s Buying…

How Much……

Now, Real-Time!
Level II
Now you “See”

Who’s Selling…

How Much……

Now, Real-Time!
Present Support &
Future Resistance
Or just the Bid & Ask
Level II – Scenarios
• Goldman Sachs is
Buying……Buying
Everything

• Wouldn’t You Like

to Know that?
• Level II makes it
SEEN
• …DAT allows you
to Trade It!
Level II is a Great Tool…..But
• It is only ONE of
many
• You need to learn
to SEE with • Next is EXDS with
new eyes Huge Support

• But the S & P

Futures are dying!
• The Resistance Starts to Take Hold
•MONT Relieves, Leaving RSSF at the Bid
•SBSH is Showing Unusual Size
•The ECN’s are Growing at the Offer
•The Prints Confirm the Weakening
•RSSF Relieves
•A Bunch Jump to the New Low Offer
•GSCO Holds the Fort
•Nobody Wants to Stick Around –
•MM’s Leave it to the ECN’s
•ECN’s Have Good size on Bid but Prints say Down
•GSCO has Moved to the 1/2
•Sentiment Has Changed 1 Minute Later
•The ECN’s are now joined by 4 MM’s at Bid
•NITE has left the Ask & moved to 13/16 or higher
•Prints show Strength to the Upside
•NITE & HRZG join the ECN’s at new HIGH BID
•MSCO has relieved to 3/4 - 1/8 move – Typical
•Looks like Resistance at Ask but it’s 4500 to 4500
•No real confirmation in Prints - yet
•MLCO, SBSH & Others lift to the 3/4
•Prints show decent Size and Number for Up Move
•JPMS Jumps higher at least an 1/8
•Prints say the ECN’s are unlikely to be Filled at 5/8
•SBSH has dropped unusual Size without being Hit
•Looks like Formidable Resistance at the 3/4
•11/16 wraps around to the Bid
•Notice the light Share Size on the MM’s on Ask
•Prints show a “crunch” through of the 3/4
•ECN’s have good size on Bid
•But MSCO wants to sell and holds the rise
•MSCO is taken out but MONT & PRUS Join the Ask
•Notice Unusual Share size for PRUS
•More 11/16’s start to Print
•PRUS lifts leaving MONT
•Meanwhile ECN’s are mounting “Size to Buy”
•3/4 wraps around & BTRD joins the Hunt
•HRZG has dropped to 5/8 – GSCO has moved up 1/8
•And NITE is showing only 500 Now
•Prints are Ambivalent
•13/16’s are taken out – Actually most canceled
•GSCO has moved from the 5/8 to the 3/4 –
a 1/8 move
•Look for a new High Bid
•We get it at 13/16 with NITE, REDI & INCA
•Prints look good for the 7/8 Attack
•But “Size to Sell” on the ECN’s
•ECN’s join the MM’s at the 7/8 with “Size to Sell”
•REDI bails from the Bid
•Prints start to show serious Size at Bid Price
•The Upturn weakens & a new Low Offer shows up
•Support looks good but the Wave has Broken,
•We settle into a Tug-of-War at 3/4 to the 7/8
Level II & DAT……..

• There’s a Lot Going on…

– Support & Resistance
– Who’s Who
– Who’s been doing it the Most
– Size of the Prints in Confirmation
– Speed of the Momentum
– The changing of Sentiment
• There’s More…..A Lot More
Who are You…and what do You want?
• Trading is NOT a
Get-Rich-Quick Scheme

• It is stepping away from

the old and dispelling
the myths…..

• It is not Magic, but

Understanding and
Hard Work
What’s DAT/ Who’s DAT?
• To explain DAT….

• “OnLine” is merely
E-Mail to a Trade Desk

• Trade Desks “Handle”

your Order

• DAT allows YOU, with help

from a Broker/Dealer
(B/D), to place and Control
Your Own Order
With DAT or Without……
• Level II Allows you to
see Buying pressures

• Level II Allows you to

see Momentum

• Level II Allows you to

see Who’s There

• DAT gives you Direct

Routing of your Order
Your Control…….. Your Fate
• DAT allows you to Enter,
Place and Monitor Orders
in the Market

• Nobody “holds” your Hand

• The Risk is controlled only

through your Knowledge
and Discipline
Reward is Equal to Risk….or not!
• Learning to Trade is
the Key…….

• Reducing Risk is the Goal…..

• Learn “How not to Lose”

First…..

• Then learn “How to Keep

your Wins”……

• Only Then is Risk = Reward

Vive La Difference!
• Direct Access Trading
gives you Power,
Direction and Dominion
over your order flow,
and over the use of Your
Money

• It’s about Time…..

• It’s about Education…
 Credits
Subject-Matter Expert
Mike McMahon
Technical Consultant
Kevin Green
Design Consultant
David Stansfield
Programming
Guy Shurki
FINIS