The Mystery Behind Level 2 and Time & Sales Data - Strong/Weak Tape & Spotting Hidden Participants
Learn how to identify strong and weak market tapes, and spot hidden market participants, on Level 2 and Time & Sales.
Level 2 Data Series Index:
The Mystery Behind Level 2 Data - Strong/Weak Tape & Spotting Hidden Participants
Real-World Application of Level 2 Data
As I research intraday setups, Level 2 becomes a prevalent theme. A theme where most prominent traders will say that it is almost a necessity to use. I thought I would try to get a grasp of what Level 2 is and hopefully document every concept that I could find on the topic.
Now we are getting into the nitty gritty of things with this post. So it may take a bit of re-reading this to understand how things are really working. I would also recommend looking at a fast-moving L2 /T&S stock. The concepts should click as you actually watch L2 /T&S data. And I think this is where most of the “intuition” comes from when traders talk about it.
When traders talk about "reading the tape", what they are really trying to do is to understand if buyers (demand) or sellers (supply) have more pressure on the stock.
Types of Tape:
Any time I refer to the “tape” it is a reference to the Time & Sales data on the stock. We will need both T&S and L2 data to understand the supply and demand, reviewing it simultaneously.
This looks like a bunch of random numbers and colors right now but we will go through each one and flush out what is going on.
Strong Tape Will Have:
On Level 2
Lack of offers! No one is willing to sell the stock.
There will be “stacking” of bids
You have way more bids compared to the offers and bids have more size
Buyers want to buy more than sellers want to sell
L2 - Stacking of Bids
Big bid orders showing clear support (sellers will need to eat that entire order for the price to drop)
Price gaps between each price level of the ask. This is because buyers will need to enter at higher levels ultimately moving the price higher with larger swings. With smaller gaps, the opposite is true, where buyers can take the ask at smaller intervals, making it less of a vicious move up compared to the gapped levels.
For example, price gaps at on the ask will look like this:
$7
$7.10
$7.15
$7.25Compared to narrow gaps:
$7
$7.01
$7.03
$7.04
On The Tape
This is what the T&S will look like. You will see a lot of green coming into the tape (buyers buying on the ask) and with larger sizes. Few sellers taking the size on the bid.
Now, in the real world, it will be hard to keep track of this as the tape will be flying by (if the stock is trading on large volume for the day) but noticing big clusters of green compared to red is a good sign.
Notes on Bullish Pressure:
The strongest breakouts will have a massive bid right behind the breakout:
This means that either:
1/ There were shorts that had STP LMT orders set at the breakout level; or
2/ Buyers tried to get in on the breakout but just missed it by a cent/s
Weak Tape Will Have:
On L2
Lack of bids! This means no one is willing to buy the stock. Offer is stacked
You have way more offers compared to the bids and offers have more size
Sellers want to sell more than buyers
On The Tape
Same as strong tape but flipped so you will see a lot of red coming into the tape (sellers selling on the bid) and with larger sizes. Few buyers taking the size on the ask.
Balanced Tape Will Have:
Price is sideways
On L2
Buyers and sellers are strong together or weak together and both sides show relatively the same size
No stacking on bid and offer OR stacking on both bid and offer
On The Tape
“Absorbing” = Hidden Bids or Asks
This is where hidden orders come into play
Absorbing size → Absorbing or soaking up size is when a market maker buys or sells more shares of the stock than they show on the level 2 screen. If a market maker is soaking up size on the ask, there’s a good chance it’s dilution and this is a bearish sign. If a market maker is soaking up size on the bid, that means they could be accumulating shares or creating a level of support, which can be a bullish sign.
Now we get into….
Hidden Strong Tape:
I think the best way to understand this is with an example:
A hidden buyer has a 1M share bid on a price level of $100. You will see that on the L2 there are balanced bids and offer sizes on both sides. When sellers try to push the price down, this hidden buyer absorbs these sellers at his bid of $100. The price therefore isn’t moving down due to selling pressure while regular buyers move the price back up. If this is a very large buyer, this will continue to happen as the price tries to spring down in price but doesn't because of the hidden buyer. You will see a grind in price downward, as the hidden buyer absorbs those price levels and buys those shares. When selling pressure stops or buyers take over, the price springs up.
On L2
There could be stacking on the offers on L2. You see these offers going through on the tape but the price is not moving down. Someone is hiding their buying!
Shorts will see the tape and get confident because they think the tape is very weak but in reality, there is heavy absorption. Shorts will realize, okay we are not moving down in price. Bids come in to move the price back up, and selling pressure comes in again but more absorption, without movement in price
It is “strong” tape because you have a buyer sitting, supporting the price up (similar to the Strong Tape section) but on L2, it is hidden. You may not notice that the price levels on the bid are not large but somehow the price is not moving lower or slowly grinding lower.
On The Tape
On the tape, however, you will see every transaction that occurs! Remember L2 can be smoke and mirrors at times. L2 are orders. T&S are executed trades… You can’t hide executed trades. So on the tape, you may see red flashing, however, the hidden buyer is absorbing the selling pressure and is holding the price up.
Hidden Weak Tape:
Again, let’s give an example:
There is a potential breakout area of $100 where the price is trading under it the whole time. Then the price breaks above $100 to $101. Although on the tape you see a lot of green (buyers taking price on the ask), the price doesn’t break out how you like it. The hidden seller is on the ask absorbing the buyers at above $100 price levels. So yes the price moves up and breaks the $100 mark but does so by grinding up and past that $100 mark as the seller is absorbing. Panic sets in and price crashes through narrow bids. Therefore big rejection!
On The Tape
Similar to Hidden Strong Tape but flipped.
Hidden Sellers and Buyers:
Both sides are absorbing size
Buyers and sellers are both hiding their share size
Price moves up but doesn’t move up quickly because a hidden seller is selling their shares on the offers and price moves down slowly because a hidden buyer is buying their shares on the bid
This is not a favorable tape to enter a trade because we don’t know who is hiding the bigger share size…
Applying These Concepts:
What you want to see from each type of tape…
Weak Tape
You want to see Weak Tape when there is a continuation downward in price (price fades). This should be after big breakdowns in price.
Hidden Weak Tape
This is when you want to enter a short. Times of pure panic, and chasing the price. Everyone is doing the same thing on the same side. Buyers are executing significant size on the ask but the price isn’t moving up significantly. When you see the price is not moving up in a very meaningful way, that’s when you want to enter short. Additionally adding to a short position, is also where you want to see hidden weak tape.
You don’t want to be shorting at the clear line break. Normally, price will break through that key level but when price breaks that level upward, the T&S will show huge bid size with bids flowing. However, the price is not moving because there is a hidden seller right above the key price level absorbing those bids up; that’s when you should be shorting. Then after that entry, you want to see heavy tape for the fade (weak tape characteristics).
***This will be the opposite in the case of strong and hidden strong tape.***
Strong Tape
You want to see strong tape when there is a continuation upward in price. This should be after big breakouts in price.
Hidden Strong Tape
This is when you want to enter a long position. Times of significant buying pressure, huge FOMO, and chasing the price up. Everyone is doing the same thing on the same side. Sellers are executing significant size on the ask but the price isn’t moving down in a significant way. When you see the price is not moving, that’s when you want to enter long. Additionally adding to a long position, is also where you want to see hidden strong tape.
FOR BREAKOUTS: You don’t want to be long at the clear line break or key price level. Normally, price will break through that key level but the T&S is showing huge sellers taking prices at the bid but the price is not moving down. Because there is a hidden buyer right above the key price level absorbing those offers up, that’s when you should be longing. Then after that entry, you want to see heavy tape for the continuation up (strong tape characteristics).
Hope this was helpful. The next post will be on the application of these concepts!
-F4VS
References:
YT Video: Level 2/Tape reading 101 Webinar, by TheShortBear
Highly recommend watching this webinar! It will give you a good starting framework.
Where most resources I have come across state a level of “intuition” that is needed from looking at the tape and gaining experience through watching, this webinar provides an incredible framework to go off of. The question that I ask myself when people say “intuition” and just look at the tape is, how and what am I even looking for? There is never a good explanation, but at least gives a foundation that I can start from!
YT Video: The Ultimate Level 2 Guide For Complete Beginners, by Live Trading by TraderTV Live
YT Video: How To Read Level 2 Market Data
Blog Post: Level 2 Quotes – How to Read Market Depth Chart [Videos]
Blog Post: Level 2 Tip: Know Your Market Makers