Secrets of Level II

ECN Aggregator ; FXOpen broker ; LPs

Today’s inexperienced traders in Forex almost stand on a par with professionals. There remains a wide gap with regard to knowledge but their odds have improved due to the proliferation of Forex-related information and different software solutions and tools, developed to facilitate their first steps in this direction.

Some brokers currently offer among other things, such trading tools as Level II. This “service” is based on providing a real-time access to the BestBid and BestAsk prices currently available in the market along with their volumes.

Level II, often referred to as Market Depth or Order Book, displays only Limit Orders and it helps to estimate such parameters as:

–         selling pressure on a financial tool at different price levels;

–         buying support of a financial tool during the price movements;

–         approximate price levels to execute an order (VWAP).

This information could be a helping hand especially when it comes to a high-frequency trading. It may help facilitate predictions such as in which direction the market will be heading.

Nevertheless, when you trade large volumes, you may not be able to obtain a complete picture of the market based on the DAB only (DAB is the Difference between the best BID and the best ASK). In this case BestBid and BestAsk charts may display much lower volumes than the desired ones. The right decision is to resort to the Market Depth values if you want your orders to be fully executed.

The Market Depth depicts the actual market situation by providing the information on current orders. Consulting PriceAsk, PriceBid and PriceAvg charts, where PriceAvg is the average weighted price, is recommended. However, Level II is not that easy to use. Traders should beware of so-called “ghost” or “fake” orders, which are deliberately used to confuse or deceive other market participants by giving a false view of price movements.

Ghost traders can be spotted by their consistent tendency to rank the top list of the best Bid and Ask. Some average and less-experienced traders may try to imitate their strategy in hope to be a success; however, this is exactly what the “ghosts” pursue. At the last moment they may remove their order and trade in the opposite direction, causing confusion among their “imitators.” For example, no sooner a group of followers places a larger order in accordance with the “successful trader,” the latter suddenly removes his order and goes in the opposite direction thus”the Sting” is executed – and naive traders have moved the price towards the level initially planned by the “ghost.”

It should be noted at this point ECN/STP has no Level II common for all traders. Instead you can see either Limit orders opened by traders within your system or some Limit volume provided by a few LPs (Liquidity Providers).

The whole trading cycle – that is processing of trading requests, filtration of quotes, margin reservation, allocation and execution of orders – is implemented through the Aggregator.

Not many brokerage companies provide such a service as aggregation of liquidity from different sources. In this regard FXOpen has made a jump on its competitors and is also the first broker offering ECN/STP technology coupled with the innovative MT4 platform. The company is consistently working on better solutions and updating its services to let its customers enjoy the best market opportunities and trade in the most convenient environment.

kiryl.kirychenka@fxopen.org'

Kiryl K.

Joined FXOpen in September 2010 as FX dealer, and assumed the Business Analyst role of Compliance Department in February 2012.

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  • Beto

    Kiryl, I guess you meant Market Depth, and not Market Death when referring to Level II. =)