If the "sub" passwords are 2 char long then then they have way too less entropy. For this to that make any sense it must use a sizable subset of the full passwo

If the "sub" passwords are 2 char long then then they have way too less entropy. For this to that make any sense it must use a sizable subset of the full password (which must be longer than usual to accommodate for that. And all this to protect for keyloggers. Probably a hardware token second factor is more effective.