Combining Level 2 and Time & Sales: Reading the Consolidated Tape

Every quote and trade on the U.S. equity exchanges is consolidated by the Consolidated Tape Association. The art of reading the tape, in the modern context of electronic markets, is one of the most rarely discussed aspects of trading today. Traders often refer back to old texts, including Reminiscences of a Stock Operator, which of course is an excellent resource in many respects, but I always felt it would be helpful to provide an up-to-date view of the practice of reading the tape in today's markets, which are dominated by ECN platforms and dark pool routes.

The term reading the tape refers to a combination of the Level 2 quotes and the Time & Sales display. Both of these features are basic necessities of any direct access trading software. If your trading software lacks either one of these, there's a good chance you are not being provided with true direct access to today's electronic equity markets and you are most likely receiving some form of filtered price quotes rather than the real live trade-by-trade feed.

Depending on the nature and time frame of your trading style and strategy, this may not be a major issue to you one way or the other, but the concepts introduced in this chapter should nevertheless be basic knowledge for anyone who aims to make a living, or even an additional source of income or equity growth, from today's equity markets.

The Level 2 quotes are, of course, simply the live feed ...

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