there are only two reasons that a market maker would give you a price that is in between the ask and the
bid. The first is when a market maker feels the stock will go the other way and leave you holding the bag.
The second is when the true market is obviously better than the level II shows when looking at the tape.
You will only be able to get a better price than the average trader a tiny percentage of the time, but by always
looking for it you stand a better chance.
This all means that there is a way to buy close to the bid and sell close to the ask when there is a
significant spread. Watch the trades that are going through and try and realize what is happening. Heres
an example: WXYZ has a bid of $.02 and an ask of $.025. You see two trades simultaneously go through at
$.023 and $.024 both for the same amount of shares. What happened was a day trader had been waiting
with a limit order to buy at $.024 and another day trader decided to sell a similar number of shares at $.023
without knowing about the other traders order. The quickest market maker simply bought the $.023 shares
and sold them for $.024 with an instant profit. Your best bet is to not wait for any length of time on a limit
order. Instead, in this example to sell, watch the tape and wait for a bunch of big block trades to go through
at $.025 and quickly send a sell order at say $.0239. Hopefully someone will fill your order in the heat of the
moment, if not cancel your order within a few seconds and wait a while. This practice will help you save a
penny or two and make for a better average.
Level II action before the bell can be misleading. Market makers will test out the waters and find out what
reactions will occur for certain actions. Watch for a stock to seemingly be bid up all morning to fall as soon
as the bell rings. Don't think that MM's are putting tons of cash on the line and are overly concerned with
risk. 5000 shares is nothing in there world and they can pull out in a heartbeat. Market Maker firms set
aside a tiny percentage of there capital for these stocks and usually get the best returns from them.
As if a ton of Market Makers with bid and ask prices is not enough for us to monitor, we also need to
pay attention to ECN's on the OTC BB. There are a few after The SEC allowed them in a couple of years
ago. They are still far from prevalent but are interesting to watch. You will notice them denoted buy the
symbols GNET or TRAC to name a couple on the level II. They provide more liquidity at a time and only on
one side of the board. They tend to stick out like a sore thumb and can be an obvious foreshadowing of
prices to come. Watch for large ECN bids when the stock is rising and see them switch over to the other
side right as the stock hits it's high. Right now they are not bothersome and in fact are fun to watch. We
will have to see how big they get over the next few years.
When purchasing high priced Large Caps or Depository Receipts such as the QQQ, we are buying a
very small amount of shares. Because of this, it is o.k. to look at ECN's. This is the only time they may be
of some benefit. Their fees are very small when ordering 100 shares or less and depending on the price
they offer may save you a few bucks.
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