Occasionally on StockTwits and Twitter I will mention something called “the tape” and may send out a tweet such as “FB holding the bid here at $81” or “KORS held the offer at $50.50 and held lower at $50.” What does this really mean? While I’m sure most of you know that the “tape” in general is a reference to the unfolding price action in the market or in a particular stock, which is true, when I (as well as other short term traders) refer to the tape with this type of wording or specificity, I’m usually referring to the tape a little differently.
The tape – otherwise known as the Level II box, market maker box, time and sales, prints, and order flow – is simply an in-depth look at the underlying market and involves analyzing bids, offers, and times and sales (aka prints). Tape reading is the most leading indicator of price action there is (which itself is a leading indicator compared to say most economic data), while candlestick charts (what is mostly associated with technical analysis) is technically a lagging indicator since they are created after the buy/sell transactions. However, one caveat before moving on: tape reading is for very short term traders, not long term investors whose time frames are multiple years (and may even not be appropriate or useful for some intermediate term swing traders who may just be technical traders). And that is ok. However, if you are a short term intraday trader, then you will most likely be watching the Level II to better gauge the current strength or weakness of a stock.
Alright, let’s get into the very basics of tape reading by first introducing the Level II box (see below). This is my Level II box on my platform. Yours may look slightly different depending on your platform, but they should all display the same basic data points: bids, offers, size, and time and sales (or prints).
This is the Level II box for Facebook. As you can see, the red highlighted part at the top is what is called the Level I box, and it shows some basic information such as the last price, change, intraday high/low, prior day’s close, etc. The highlighted part below that is called the Level II box and is where the bid, offers, and associated size is located. On the far right of the picture you see the Time and Sales (or prints), which shows the actual transaction price and size of an executed trade, with the most recent trade at the top. Note, this platform lists volume size in increments of 100 share lots, so 1 equals 100 shares, 10 equals 1,000 shares, and so on. The color coding of the prints in the Time and Sales is pretty straightforward as well: red = trade was executed at the bid (i.e., the seller accepted the buyer’s bid price and “hit” the buyer’s bid; green = trade was executed on the offer (i.e., the buyer, rather than posting their limit order and trying to get hit on their bid, paid the seller’s offer, sometimes known as crossed the spread); white prints = trade was executed in between the bid and offer (generally at the midpoint of the spread); highlighted prints = the trade was executed at a price above or below the best bid or offer (generally not considered all that important).
In the example above, you can see FB was quoted at $81.75 with the best bid at $81.74 for 500 shares on ARCA (an ECN) and the best offer at $81.75 for 500 shares on Nasdaq. You can see the last executed trade on the Time and Sales on the far right was $81.75 for 100 shares. Notice also that the print is green, meaning that the trade was executed on the offer.
That’s all for now. I just wanted to do a brief introduction to the tape and how to read the Level II. I will try to do at least another related post to share with you some actual tape reading strategies that traders use and how you can use the tape to your advantage in real-time.
Thanks for reading. Please let me know if you have any questions or comments.