Level 2

Level 2 (or Level II) is a subscription-based service that offers real-time access to the NASDAQ (National Association of Securities Dealers Automated Quotations) order book and was first launched in 1983 as Nasdaq Quotation Dissemination Service (NQDS). For NASDAQ equities, Level II is basically the order book. Orders are placed through numerous market makers as well as other market participants. It is meant to show traders and investors the depth and momentum of the market.

The service offers price quotes from market makers authorised to trade every security listed on the NASDAQ and the OTC (Over-the-Counter) Bulletin Board. The ask prices and sizes are displayed on the right side of the Level 2 window, and the bid prices and sizes are displayed on the left.

Traders can get market depth and momentum statistics through NASDAQ's Level 2 subscription service. The purpose of this service is to give an aerial view of market activity. Level II will provide a thorough understanding of the price action by presenting a ranking list of the best ask and bid prices from each participant. It can be quite helpful to know exactly who has an interest in a stock, especially during the day trade.

With Level 2, traders and investors have an advantage when putting trading techniques into practice due to the additional details on pricing activity and market momentum. Users can access depth pricing information at Level 2, including all prices posted by market makers & ECN (electronic communication network).

On the other side, Level 1 provides the inside or best ask and bid prices, which is sufficient information to meet the requirements of the majority of investors. But Level 2 is frequently preferred by active traders since it shows the demand and supply at price levels above or below the national best bid offer (NBBO) price. This provides a visual representation of the price range and related liquidity at each price point for the user. A trader can decide on entry or exit positions with the help of this information, ensuring the liquidity required to finish the trade.

Level 2 only depicts the current price and liquidity, and price movement on Level 2 does not always correspond to the recorded deals. This is a significant distinction because, despite the absence of actual executed trades, high-frequency trading programs frequently dramatically alter Level 2 bid & ask prices to shake the trees and frighten viewers. However, in momentum stocks, this method is frequently used.

Category of Participants

The market has three basic categories of participants: wholesalers, electronic communication networks, and market makers.

The Market Makers (MM)

These are the participants who give the market liquidity. In other words, they typically buy when no one else is purchasing and sell when no one else is selling. They make the market.

Electronic Communication Networks (ECN)

Computerised order placement systems are a part of electronic communication networks. This system matches buying and selling securities orders. It is significant to know that anyone, including big institutional traders, can trade through ECNs.

Wholesalers (Order Flow Firms)

The order flow of many internet brokers is sold to wholesalers. Then, on behalf of online brokers, these order flow companies carry out orders (usually retail traders).

Note: The four-letter ID displayed on level II quotes allows for the identification of each market participant.

Level 2, Reserve, and Hidden Orders

The ability for traders to place reserve and hidden orders is provided by many ECNs, which are automated processes that match buying and selling securities orders. ECNs often show the best bid and ask prices from various market players and automatically match and carry out orders. Reserve order options, which include a price and display size in addition to the actual size, are available on ECNs. This order hides the exact size of the complete order and only displays the specific display size on Level 2.

On the ECN, hidden orders, which provide a choice for investors to hide huge orders from the market, work similarly but are invisible on Level 2. As a result, the pricing determination has more discretion. Checking the time and sales for trades at the given prices is the best way for users to know the status of the reserve or hidden orders.

Why is trading with a Level 2 quote beneficial?

One of the biggest benefits of using Level 2 quotes is access to a wealth of market data. Additionally, there are many other profitable uses for this content. For a stock trading on NASDAQ, for instance, one may determine the liquidity volumes & order sizes. One may also spot trends using data on the bid and ask orders.

Level 2 quotes also provide crucial details about market makers and large investors. Traders can benefit from using this knowledge. For instance, they can compare order sizes to see whether an institutional investor is interested in a large stock and then place similar orders. With reserve orders, which are large orders divided into smaller quantities, an identical approach can be employed. Traders can make identical orders once they have found hidden orders in L2 quotations since institutional investor activity will assist in establishing resistance and support levels for the price of that share.

Level 2 Quote Example

For a specific stock, a Level 2 quote contains six crucial columns. MMID is the first one where the four-letter word is the designation for market makers. The market maker's bid, or the price they are prepared to pay for that share, is listed in the second column. Size is the third column. The number of orders the market maker placed in that size is shown in this column.

Identical columns can be found in the following three blocks on the right. The only exception is the asking price at which the market maker is prepared to sell a security. Traders can use the gap between the ask and bid prices to gauge pricing pressure and apply trading strategies.