- Bid Price
- Ask Price
- Level 1
- Market Makers
- Smart Routing
- Time & Sales
- Level 2
- Dark Pools of Liquidity
- Relative Volume
- A Thin Market
- A Thick Market
- Circuit Breaker Halts
- Market Orders
- Limit Orders
- Stop Orders
- FOK Order
- GTC Order
- Fill Price or Getting Filled
- Stop Limit Order
- Time In Force
- Trailing Stop
- One Triggers Other
- Good Till Canceled
- One Cancels Other
- Partial Fill
Bid Price #
The Bid Price is the price traders are currently bidding a stock at. Every stock has a bid. Lets say traders are bidding 10.00. Traders can put an order to buy at 10.00, and they will have to wait for a seller to come sell them shares. Alternatively, they can simply buy from a seller who is sitting on the ask at 10.02.
Ask Price #
The Ask price is the price traders are currently asking to sell the stock at. Every stock has an ask. Lets say traders are asking 10.02. Traders can put an order to sell at 10.02, and they will have to wait for a buyer to come buy shares from them. Alternatively, they can simply sell to a buyer who is sitting on the bid at 10.00.
Level 1 #
Level 1 is the Current Bid Price vs the Current Ask Price. In the above example, 10.00 x 10.02
The Spread is the difference between the Bid price and the Ask price. In the above example we have a 2 cent spread.
Market Makers #
Market Makers create the spread. They are large institutional banks that are both buyers and sellers of a stock. They will post a Bid, and Post and Ask. They create the spread, and the profit by selling shares between the spread. The larger the spreads, the more the market makers can profit
Electronic Communication Networks. If you think of the stock market as an island, there are many bridges we can take to get to the island. These bridges are called ECNs or Market Makers and they charge “tolls”, or fees, to use their networks.
Market Makers offer a route that connects individual traders to the market. When traders choose to use specific market makers or ECNs, they are direct routing. The advantage is that this can increase the order speed. Returning to the idea of an island, ARCA (short for archipelago), is a popular route. Other popular routes include NYSE, EDGX, JPCC, POST, INET.
Smart Routing #
Most brokers offer smart routing. Instead of asking you to direct route your order, they will choose the route they feel is best. If they have arranged a discounted rate with a certain broker, they may use that route as a preferred route. They may also see if they have shares available from traders inside the firm before routing your order out to the “island”. This may not always be in the best interest of the trader. For that reason, I choose to not use smart routing, and instead direct route my orders.
Time & Sales #
Next to the Level 2 Window is typically a Time & Sales Window. This will show every transaction that occurs and will list the price, the shares, the route, and the time. This transactions will appear red if they occur at the bid price, green if they occur at the ask price, and white if they occur in between the spread. Remember that the market is a closed system, every buyer has a seller, and every seller has a buyer. We consider transactions “sales” or “buys” based on the whether the transaction goes through at the bid price or the ask price.
Level 2 #
In addition to understanding Level 1 and the bid/ask, day traders need to understand Level 2. Lets start by talking about the Bid. If the bid is 10.00, there is a buyer sitting waiting to buy shares at 10.00. But are there other buyers also lined up? By using Level 2 data, we can see buyers at 9.99, 9.98, 9.97, and so on. We may see bids stacked tightly on the Level 2, or we may see them spaced apart such as 9.95, 9.89, 9.74, 9.64. When we see full market depth on both the Bid side and the Ask side we are seeing complete level 2. Although Level 2 is shown with Bids on the Left and Ask on the Right, some software choose to show it as a long line going left to right, with the current price being in the middle. In addition to seeing the prices where orders are listed, Level 2 also shows the number of shares for each order, and the market maker or ECN (electronic communications network) that is routing the order.
Dark Pools of Liquidity #
Dark Pools of Liquidity are like ports the “island” that are holding shares, but nobody can see them. Sometimes these shares are being held by firms or institutions and they trade internally out of this pool of shares. This has a disadvantage for retail traders because if you want to buy 10k shares, you will not have access to the dark pool where 10k may be available. As a result, you pay a higher price. Using Dark Pool Routing, you can now ping the dark pools to see if they have shares available.
Volume is a measure for the number of shares traded. A stock that trades 1 million shares in a day has a volume of 1 million. Some stocks trade tens of millions in volume each day while others trade just a few hundred thousand shares or less. As we watch the Time and Sales, we are able to see volume.
Relative Volume #
Relative volume is one of the most important indicators day traders need to know. It shows how much volume a stock has compared to it’s average volume for the same period. It acts as a gauge indicating how in play a stock is and the more in play it is, the more likely setups with follow through.
A Thin Market #
A thin market means not many traders actively trade a particular stock. It may also mean not many market makers are actively “making the market” for those stocks by providing a reasonable bid/ask spread. Thinly traded stocks can have 20-30 cent spreads which makes it very difficult to trade. These stocks often have a low float (few shares available to trade). When they experience strong demand, these stocks can quickly move 50-100%. They are worth watching for day trade opportunities.
A Thick Market #
Thickly traded markets and stocks will be crowded with traders. Many times these stocks have very large floats, are very well capitalized, and trade slowly. This makes them great vehicles for long term and lower risk investment. At the same time, that makes them unattractive for day traders. Even with high demand they rarely move that quickly.
Circuit Breaker Halts #
Stocks can be halted and paused from trading for several reasons. During circuit breaker halts traders cannot trade the stock in any way. Halts can last from 5 minutes to hours or days. We have written extensively on Circuit Breaker Halts since there are several important points to understand.
Market Orders #
A market orders tells the broker to get you shares at current market prices. If you send the order to buy 1,000 shares at 5.00, the broker will get you 1,000 shares, but since you haven’t said the most you are willing to pay, they may give you shares at a higher price. If you accidentally type in 100,000 shares, you may get filled at 5.50 or higher.
Slippage is the difference between the price you thought you would trade at, and the price the trade actually went through. This is the result of fast moving markets, volatile stocks, and spreads.
Limit Orders #
A limit order is when you ask your broker to buy you shares and state the most you are willing to pay. A limit order of 1,000 at 5.05 will not fill higher than that price. That means if the price moves quickly, you may not get 1,000 shares.
Stop Orders #
Stop orders are a versatile order that can be great for getting in and out of trades. When you place a stop order you are saying that you want to get in or out of a trade when prices hit your stop price and once they do, it turns into a market order and will execute at the next available price. Stop orders are mainly used for protecting long or short positions once you get into a trade.
FOK Order #
This is Fill or Kill. This means either you get your entire order filled or the order won’t fill at all. This prevent partial orders, but I don’t like using it.
GTC Order #
This is a Good Till Cancelled. That means the order will stay on the brokers servers until you cancel it.the order is automatically sent. Stop orders can be sent as both market orders or limit orders.
Fill Price or Getting Filled #
This is the price the trades are executing at with your broker. This becomes your average cost.
Stop Limit Order #
A stop limit order refers to an order placed with a broker and combines the features of both stop and limit orders making a more technical order.
Time In Force #
Time In Force refers to a special directive implemented by traders or investors when placing a trade and is submitted when entering a trade.
Trailing Stop #
A trailing stop order is a stop order that allows the setting of the value as a percentage usually below the market price and will move as prices move.
One Triggers Other #
One triggers other is a contingent order where a primary and secondary order are placed and when one order is triggered, the other order is triggered.
Good Till Canceled #
A Good Till Canceled (GTC) order refers to a buy or sell request designed to last until the request is executed or canceled by the trader or broker.
One Cancels Other #
A one cancels other order is where two orders are made and if one of the orders is executed, the other is cancelled automatically.
Partial Fill #
This is when you have a limit order that is too tight and you only fill part of your entire order. The remaining order needs to either be cancelled or you have to keep waiting to see if the price comes back to give you the rest of your fill.