Day Trading Lessons - Level 2 Spoofing, MID, Hiding Order Size, Liquidity & More

Level 2 was first introduced in 1983 and was named the NQDS (Nasdaq Quotation Dissemination Service) to give traders real-time access to the Nasdaq order book. It enabled traders for the first time to get a complete overview of all the orders sitting BELOW the NBBO (National Best Bid Offer). This then gives the trader the ability to see the whole market depth of orders sitting alongside the ability to gauge potential momentum which can be invaluable for a day trader.

What a lot of new day traders don’t realize is what level 2 is actually reflecting is the SUPPLY & DEMAND. Vital information if you're looking to gauge the direction. The BID reflects the DEMAND and ASK reflects the SUPPLY at any given time, being able to spot these can really give you an edge.


A commonly asked question from our newer traders on the desk when it comes to Level 2 is adding and taking of liquidity. If a Trader wants to get into a Long position by buying a stock as an example. There are two methods in which they can get into that long position. They can sit on the BID as a Buyer thus making a market waiting until their order is filled by a seller. If filled they will be ADDING Liquidity and will be typically paid an ECN Rebate for doing so. If however, you want to get into a position fast you can go to a Seller on the ASK thus TAKING liquidity and you would be charged by the ECN for taking that liquidity.

SSR is on and you're unable to short the bid but you want to take liquidity to get short fast in a low liquidity environment. At TraderEquity due to the extensive access of professional routes, Dark Pools and liquidity searching algo routes we offer. Our traders are able to PEG orders to the MID Price between the BID and ASK (NBBO). Which will enable you to try and seek out liquidity to get filled whilst SSR is on. Thus having a major advantaged over a retail trader using a standard brokerage.  

Hiding large order size is something that is also possible using the Professional Trading Software we use and offer Sterling Trader Pro (a feature NOT available at a lot of retail brokers). What your able to do is display the size you want to show on the Level 2 thus hiding your true size, as an example 10,000 shares can be displayed as 100 shares. Although this is something that has its advantages, we would highly recommend if trading large blocks to route your order to one of our dark pools or dark routes so you can completely hide your orders from the market.

Level 2 as you may now be starting to realize doesn’t truly reflect exactly what it appears with traders able to hide size or route to dark pools/routes. Therefore be warned as there is a lot of games also played by algorithms or HFT (High-Frequency Traders) to trick you into thinking there is demand when there really isn’t.

Spoofing is something that was part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. This is the process of placing large orders into the market and then cancelling these just before they’re filled, something that HFTs have the ability to do. This then can mislead other market participants into thinking there is demand or supply when there really isn’t. Spoofing was blamed for causing the 2010 flash crash where the market dropped about 9% in minutes. It was claimed to be caused by a UK based trader named Navinder Singh Sarao nicked named the Hounslow Day-Trader. It was reported that he had placed around $200 million worth of bets on the E-mini S&P500 futures contracts and then replaced or modified these 19,000 times within an afternoon before they were then cancelled.  Enabling the trader to manipulate the price and profit handsomely.

Having access to the right routes and infrastructure is now a major advantage over the average retail trader. We pass on all ECN rebates when you add liquidity enabling you at times to completely outstrip commission thus be paid to trade. Alongside the ability to route orders to the MID price when SSR is on or using one of our extensive list of proprietary trading routes or dark pools to hide your large size. These are just a few reasons why professional traders chose TraderEquity over a retail broker.

Happy Trading!


Published 27/05/2019

Please Note: We can NOT accept any US-based traders, this restriction is based on their location rather than their nationality and we can NOT accept any Canadian based traders directly.


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