What Is Level 2
Let me explain Level 2 to you directly: it started back in 1983 as the Nasdaq Quotation Dissemination Service, or NQDS, and now it's a subscription service giving you real-time access to the NASDAQ order book. You get to see bid and ask prices along with order sizes from market makers and electronic communication networks. This setup is designed to show you market depth and momentum, helping you as a trader or investor make informed decisions.
In the Level 2 display, you'll find bid prices and sizes on the left and ask prices and sizes on the right. It covers quotes from market makers for every NASDAQ-listed and OTC Bulletin Board security, giving you a clear view of what's happening in the market.
Key Takeaways
Here's what you need to know upfront: Nasdaq's Level 2 service delivers market depth and momentum data straight to you as a trader. It's built to give you an overview of market action, and the extra details on pricing and momentum can really boost your trading strategies.
Basics of Level 2
When you use Level 2, you're getting in-depth price information, including all the prices posted by market makers and ECNs. Level 1 might be enough for most investors with just the best bid and ask prices, but if you're an active trader, you'll want Level 2 because it shows supply and demand beyond the national best bid offer, or NBBO.
This visual lets you see the price range and liquidity at each level, so you can pick entry or exit points that ensure the liquidity you need for your trades. Keep in mind, though, that price movements on Level 2 don't always match actual trades—it's just showing available prices and liquidity. High-frequency trading can shake things up by adjusting bids and asks dramatically, especially in momentum stocks, even without real trades happening.
Level 2 and Reserve and Hidden Orders
Many ECNs let traders post reserve and hidden orders, and these affect what you see on Level 2. ECNs match buy and sell orders automatically and show the best bids and asks from various participants.
A reserve order includes a price, a display size, and the actual larger size—only the display size shows up on Level 2, hiding the full order. Hidden orders work similarly but stay completely invisible on Level 2, giving more discretion on pricing. To spot these, check the time and sales reports for trades at those prices.
Benefits of Trading Using Level 2 Quotes
The biggest advantage of Level 2 is the detailed market information it provides, which you can turn into profits in different ways. For instance, you can check liquidity volumes and order sizes for Nasdaq-traded stocks or spot trends from bid and ask data.
You'll also see info on market makers and institutional investors, and you can use that to your benefit. If you notice a big institutional interest through order sizes, you might place similar orders. The same goes for reserve orders, which are large ones split into smaller lots—once you identify hidden ones via Level 2, mirroring them can leverage institutional support for price levels.
Example Level 2 Quote
In a typical Level 2 quote for a stock, there are six key columns you should pay attention to. The first is MMID, which is the four-letter ID for market makers. Next is Bid, the price they're willing to pay, followed by Size, showing the number of orders at that level.
On the right side, it's similar: Ask is the selling price, with corresponding size. You can look at the spread between bid and ask to gauge pricing pressure and build your trading strategies around it.
Other articles for you
Dividend aristocrats are S&P 500 companies that raise dividends annually for at least 25 years, providing steady income and other benefits to investors.
A lessor is the owner of an asset who leases it to a lessee in exchange for payments, commonly seen in real estate and other property arrangements.
IRS Publication 590 is a comprehensive IRS guide detailing rules for individual retirement arrangements like IRAs.
A retracement is a temporary pullback in a stock's price against its main trend, distinct from a full reversal.
Exchange-traded derivatives are standardized financial contracts traded on regulated exchanges, offering advantages like liquidity and reduced risk over OTC derivatives.
Prepaid expenses are advance payments for future goods or services recorded as assets on a company's balance sheet until the benefits are realized.
Actuarial gains and losses represent changes in a pension plan's projected obligations due to updates in actuarial assumptions like discount rates and expected returns.
Present value estimates the current worth of future money to aid investment comparisons.
An oil field is a land area for extracting petroleum like crude oil or natural gas from underground reservoirs.
A down round happens when a private company sells additional shares at a lower price than in previous financing rounds due to a decreased valuation.