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Advice/Tips on Level 2 and DMA

Tips on Level 2
Written by Andy

A good platform is essential if you are an active trader. You will need a good news service that is real time/up to date.

Level 2 and Seeing the Order Book

Level 2 is essential. This means you can see the order book. Many commentators say when you haven’t got level 2 you might as well be driving through a forest with no head lights on in the middle of the night. In other words you are trading blind. Level 2 can help you to time your entry and exit points out of trades. As you can see from diagram 2 above, you can see all the orders/ the strength of the order book for VPC. To the right side of the screen, you can see a list of all the trades that have taken place: the volume bought or sold and at what price. The yellow strip at the top of diagram 2 is the market prices. The left side of the order book tells you what investors are looking to buy : volume and price. Conversely, the right side of the order book tells you what investors are looking to sell. Other data displayed include the high and low price traded for the day and the volume traded in the stock for the day etc.

Below are screen shots of my platform that Etrade provides. Diagram 1 shows the tiled viewed that can be fit on one screen. This includes the real time streaming news service and the level 2 feed for 2 different stocks: Venture production (VPC), Vedanta Resources (VED) and BHP Billiton (BLT). Diagram 2 shows the enlarged view of level 2 feed for Venture production.

Direct Market Access

Level 2 DMA Access

Direct Market Access

DMA stands for direct market access. When I first started trading I used City Index in the UK. Their service was based on quote driven prices. So basically this meant that City Index gave me the market price that is displayed on the yellow strip of the level 2 diagram. On top of this I was charged 20bps per trade. So 40bps in total to buy and sell some stock. This then means that your stock has to move quite some way before you are even in profit. Enter DMA… With DMA, you can place your own orders and decide what price you would like to try buy at. Often, I have placed an order to buy some stock at 10p below the market price and during afternoon volatility my order gets filled quickly before the price returns to the market price. This is just one example of the efficiency you can achieve with DMA. It gives the investor the power. So say, City Index is telling me I can buy @ £7.10 and sell @ £7.00 ( these are the market prices in the yellow strip on offer), with DMA I can place an order myself and try buy @ £7.01. If my order gets filled I have just saved myself 9p. If I was buying 10000 shares, this equates to a saving of £900. Savvy? If I bought from City index @ £7.10, I would then have to wait for the share to move another 4 or 5p up to £7.15 in order to even start looking at a profit. For an active trader, this is ridiculous. You need to buy and sell on your own terms that I described above. Another feature of DMA is that you can, enter the opening (7.50am to 8am) and closing auctions (4.30pm to 4.35pm). Some times the best prices are got in these times.

Negotiate Commissions

Commission costs:I used to work for a large broker and our clients included pension funds etc. The big clients were trading DMA for as low as 3bps. A lot of times amateur investors or even professionals are shy when asking for reductions in their comm. Don’t be. If you trade actively with a discount broker, you should be paying no more than 10bps a trade.

“Direct Access allows you to almost become a Market Maker yourself. You can buy on the bid by placing an order one cent better than the existing best bid and you then become the next in line for someone to sell to. Having bought your shares you can, if you wish, immediately put them out for sale on the offer side, probably at a level 15 cents or so higher, thus making the spread for yourself, i.e. almost being you own market maker. Get plenty of experience trading more conventionally before venturing down that route, however.”

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