Defination
Level 2, initially introduced in 1983 under the name Nasdaq Quotation Dissemination Service (NQDS), is a subscription-based service that grants users real-time access to the NASDAQ order book. It is designed to provide investors and speculators with market-depth and momentum information.
The service provides price quotes from market makers registered in all NASDAQ-listed and OTC Bulletin Board securities. The bid and offer prices and sizes are displayed on the Level 2 window, with the former on the left and the latter on the right.
Essentials of Level 2
Level 2 offers comprehensive price information to consumers, encompassing all prices published by electronic communication networks (ECN) and market makers.
Level 1 provides sufficient information to meet the requirements of most investors, including the most recent or highest bid and ask prices.
On the other hand, active traders frequently favor Level 2 because of its capacity to depict supply and demand at price levels that are higher than or lower than the national best bid offer (NBBO) price. This provides a graphical representation of the price range and the corresponding liquidity at every price level for the user. By utilizing this data, a trader can identify exit and entry points that guarantee the necessary liquidity to execute the trade successfully. Level 2 merely indicates the prevailing price and liquidity and does not necessarily reflect the recorded transactions in its price fluctuations. This differentiation is crucial as it enables high-frequency trading programs to manipulate Level 2 ask and bid prices erratically, causing spectators to be alarmed and trees to tremble despite the absence of actual executed trades. This is an everyday occurrence in momentum equities.
Reserve and Hidden Orders at Level 2
Many ECNs, which are automated systems designed to match buy and sell orders for securities, provide traders with the functionality to publish reserve orders and concealed orders. ECNs typically exhibit the highest bid that is currently available, solicit quotes from numerous market participants, and implement orders automatically.
Reserve orders comprised of the actual size, pricing, and display size are available through ECNs. This order conceals the actual size of the complete order, so it only exhibits the specified display size on Level 2.
Hidden orders, an option on the ECN that allows investors to conceal sizable orders from the market, operate similarly but are not visible on Level 2. This affords greater latitude in the process of setting prices. Users can most effectively ascertain the status of hidden or reserve orders by examining the time and sales figures for transactions conducted at specified prices.
Advantages of Utilizing Level 2 Quotes in Trading
The primary advantage of utilizing Level 2 quotes is gaining access to a plethora of market-related information. This information may be utilized for financial gain in a variety of ways. For instance, liquidity volumes and order quantities for a stock traded on Nasdaq can be determined. Trends can also be discerned by analyzing bid and offer order data.
Level 2 quotes additionally encompass significant information about market makers and institutional investors. The information above can be advantageous for traders. For instance, they can copy the orders of institutional investors interested in a particular stock based on the order sizes they provide. Utilizing a comparable approach can be extended to reserve orders, wherein substantial orders are divided into more manageable quantities. After spotting hidden orders in L2 quotes, traders can place similar orders because institutional investors’ actions will affect the price of that stock by establishing resistance and support levels.
Quote Example for Level 2
Six columns are crucial when analyzing a Level 2 quotation for a specific stock. Initially, there is MMID. This column specifies the four-letter market operator identification number. The bid, or the price at which the market maker is willing to purchase the stock, is listed in the second column. Size is the final column. The number of orders issued by the market maker at that size is indicated in this column.
The three columns that persist on the right-hand side are similar. The only exception is the price at which the market maker is willing to sell the stock. Traders can utilize the difference between the offer and bid prices to ascertain pricing pressure and execute trading strategies.
Conclusion
- Traders can get market depth and movement data from Nasdaq’s Level 2 subscription service. Its purpose is to give a broad picture of what’s happening in the market.
- Traders and investors can better put their trading plans into action with the help of extra knowledge about price movement and market momentum.
