Level 2

What is level 2

Launched for the first time in 1983 under the name of Nasdaq Quotation Service (NQDS), Level 2 is a subscription service that provides real-time access to the NASDAQ order book. It is intended to show the depth and momentum of the market to traders and investors.

The service provides quotes from market makers listed on all securities listed on the NASDAQ and OTC Bulletin Board. The level 2 window displays the prices and sizes of the offers on the left side and the prices and sizes of the offers on the right side.

Key points to remember

  • Nasdaq’s level 2 subscription service provides traders with depth and momentum statistics. It is intended to provide an overview of market action.
  • The additional information related to price action and market dynamics gives traders and investors a head start in implementing trading strategies.

Level 2 basics

Level 2 provides users with detailed pricing information, including all of the available prices that market makers and electronic communications networks (ECNs) post.

Level 1 provides enough information to meet the needs of most investors, providing internal prices and the best bid and ask prices. However, active traders often prefer level 2 as it displays supply and demand price levels above or outside the price of the best national supply (NBBO). This gives the user a visual display of the price range and the liquidity associated with each price level. Using this information, a trader can determine the entry and / or exit points that provide the necessary liquidity to complete the transaction.

The price movement at level 2 is not necessarily a true reflection of the transactions recorded; Level 2 is only a display of the available price and liquidity. This is an important distinction because high frequency trading programs frequently adjust level 2 offers and violently demand prices to shake the trees and panic spectators despite the lack of executed trades. This practice is common in momentum stocks.

Level 2 and Reserve and hidden orders

Many ECNs, which are automated systems that correspond to orders to buy and sell securities, offer traders the ability to issue reserve orders and hidden orders. ECNs generally display the best offer and demand for quotation from multiple market players, and they also match and execute orders automatically.

ECNs offer a reserve order option, which consists of a price and a display size with the actual size. This command only displays the specific display size at level 2 because it hides the actual size of the entire command.

Hidden orders, which are an option where investors can hide large orders from the market on the ECN, work in the same way but are invisible at level 2. This allows for greater discretion in determining prices. The best way for users to determine the status of standby or hidden orders is to check the time and sales of transactions at the prices indicated.

Benefits of trading using level 2 quotes

The main advantage of using level 2 quotes is to have access to a multitude of market-related information. This information can be used in different ways for profit. For example, you can check the liquidity volumes and order sizes for a stock traded on the Nasdaq. You can also identify trends using information on bid and request orders.

  • Important information about market makers and institutional investors is also available in Level 2 quotes. Traders can use this information to their advantage. For example, they can assess the interest of an institutional investor for a large stock based on the size of their orders and place identical orders. A similar strategy can be used with reserve orders, which are large orders divided into smaller lots. Once they have identified the hidden orders in the L2 quotes, traders can place similar orders as the action of institutional investors will help support and maintain the stock price levels.

Example of level 2 quote

There are six important columns in a level 2 listing for a given stock. The first is MMID. This column identifies the four-letter identification for market makers. The second column is Offer or the price that the market maker is willing to pay for that stock. The third column is Cut. This column is the number of orders placed by the market maker at this size.

The other three columns on the right side are similar. The only exception is Request, which is the price that the market maker is willing to sell this stock price. Traders can use the difference between bid and ask prices to determine pressure on prices and to implement trading strategies.

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