Trading UK Shares Using Level 2

Level 2 is a very useful share trading and investing tool because it offers you live streaming of the order book of any share you wish to view. So with this information you can tell how many buyers and sellers are sitting on the order book ready to buy or sell a particular share. So how is this information useful to you?

Well for a start you can quickly and easily see where the share price is likely to move in the near future. There's no guarantees but the general rule is that the more buyers that are placing orders directly onto the order book of a share, the more likely it is that the share price will move up, and vice versa.

It is basically a snapshot of demand and supply. For instance if total orders on the buy side (ie the left hand side) are equal to 200,000 shares and there are just 10,000 in total on the sell side then you would justifiably expect the share price to move up in the near future.

Unfortunately although Level 2 is a great tool, it's not necessarily as easy to make profits as it may seem. You just have to spend a day or so watching the Level 2 screen for a particular stock to see all kinds of games being played.

Anyone with direct market access can now place trades directly onto the order book so this means that you will often see people entering and deleting orders to distort the order book. For example people will often place large orders just far enough from the current price so that it's in no danger of being triggered. So if this order was on the sell side of the order book, people viewing Level 2 would automatically see the big seller and therefore would be inclined to go short themselves. However if the price rises and threatens to take out this order, the person will suddenly remove the order and the price will continue rising and the traders will have been caught out.

Another common occurrence on Level 2 is iceberg orders. This is where people automatically place a new order every time one of their orders is triggered, and is a good way of filling a large order because people don't notice lots of smaller orders.

Finally there's the problem of market makers. They play all kinds of games with investors, and have a lot of influence on the share price, particularly with smaller shares. It's not uncommon for market makers to suddenly raise or drop their orders on the order book to either shake weak holders out, or to encourage them to buy more shares from them.

So overall although Level 2 is a useful tool, it's not necessarily a foolproof method of making money. It's useful for showing demand and supply at any one time for a particular share, but this information can also be misleading as well.

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