Some pictures are worth a thousand words, the one below is worth thousands of dollars.
We’ve written articles in the past about the importance of level 2 when trading penny stocks and ELRA offered a great example as to why today. With the stock up 230% the market maker UBSS (who routes trades for Charles Schwab) put an order of 3,905,000 shares on the ask at .018 (as seen in the picture above). If you only had a level 1 quote you would have never known the order was there.
Using a quote from yahoo finance, or etrade, or scottrade would have just shown you the best bid and best ask at the time, which in this case was 0.0165/.0175. Such a quote might have led you to believe that ELRA was holding just fine and worth trading. However, someone with level 2 would have seen that while .0175 was the best ask at the time, there was a $70,200 order trying to sell at $0.018.
The trader who had level 2 wouldn’t never considered playing ELRA because of this huge order on the ask. The person with only a level 1 quote though might have bought shares at .0175, completely oblivious to the huge order for sale at 0.018. This is just another example of why having level 2 is so important. Level 2 can help you make great trades and it can keep you from making terrible ones.
Oh and by the way, since that order for 3,905,000 shares showed up at .018 ELRA has gone on to decline to .013. The reason is likely because traders with level 2 saw that huge sale and decided to dump their remaining shares. Combine that with all of the traders who aren’t playing it in the first place because of the huge sell order looming on the level 2 and you’ve got the perfect storm for a retreat to lower prices. So if you are still trading without level 2, you are truly doing yourself a disservice.
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