Level 2 Stock Market Data – How to Read it? Why Investors Use it?

Trading concepts

Level 2 Stock Market Data

Market data available for traders is of two types – Level 1 stock data and Level 2 stock data. Level 2 data is the ultimate source for traders to get more detailed information than Level 1 data. Want to know more about market data and types of market data? Then today’s guide is exactly what you need. 

Given the importance of stock data for stock traders, we decided to help you understand it in the most simple words. Our today’s guide will help you understand what market data is and its types. However, our special focus will be on Level 2 stock data, how to read it, and why investors use it. Let’s begin right away. 

What is stock market data?

Stock market data is extremely useful data that a trading venue such as stock exchanges provide traders with. It helps traders stay updated on the latest prices of financial instruments such as stocks. Traders can capitalize on the market data to make on-the-spot market decisions. In fact, market data makes it easier for traders to decide whether to buy or sell stocks. Moreover, it also helps traders identify the market trends when they look at the current as well as historical data.

Types of stock market data

There are two types of stock market data – Level 1 stock data and Level 2 stock data. 

1. Level 1 stock data

Level 1 stock data is the basic type of market data available to investors. It helps traders analyze the market using information such as useful best bid/ask size, last price, and volume. So, Level 1 data is also useful but its usefulness is limited to chart-based trading systems. Simply put, Level 1 stock data offers the following key data pieces;

  • Bid price – indicates the highest quote price traders are willing to pay for a particular instrument 
  • Bid size – tells about the amount of that instrument traders are seeking to buy at the bid price
  • Ask price – pinpoints the lowest price sellers are willing to accept for a particular instrument
  • Ask size – shows the amount of that instrument sellers are looking to sell at the asking price
  • The last price – tells about the latest or most recent price of the trade of a particular instrument
  • The last size – indicates the latest size or amount of the instrument involved in the latest trade

It is important to note that understanding Level 1 is a prerequisite to understanding Level 2 data. Therefore, you should keep the above information in mind before heading forward to Level 2 stock data.

2. Level 2 stock data

Level 2 stock data is based on Level 1 data but it offers more detailed and more useful information for traders. It doesn’t just provide information such as the highest bid/ask but also presents bid/ask size at other prices. Level 2 data also indicate market depth and much more.

Level 2 stock data explained

Let’s make use of imagination here and see how it goes. Imagine you are trading stocks of a particular company. Now, you have access to real-time information about how many orders are being placed by traders before those orders get fulfilled. Imagine again that you also know the size of those orders and the speed at which buyers find sellers for those orders. What if you also get to know in real-time the prices of numerous orders at any given time? Will your trading get a bit easier? Yes and that is the Level 2 data.

As we have discussed earlier, Level 2 stock data offers detailed information. It is also called an order book as it also shows orders placed by traders that are to be filled. This is the order book that tells traders all the top offers and bids. Simply put, Level 2 data is the source to see the best bid and offer, the volume accompanying those offers and bids, and other top bids and offers. 

If we make it more simple, Level 2 stock data show price quotes of limit buyers and sellers whose orders are in queue waiting to be filled. That’s why it is also referred to as Level 2 quotes. So, traders who know how to read Level 2 data can easily identify who is buying and who is selling. It doesn’t mean, however, that the personal information of the buyers and sellers is there. Quotes are anonymous and there is no indication of the identity of the potential buyer or seller. 

How to read Level 2 stock data?

So, you know what kind of information Level 2 stock data presents. Now, it is time to learn how to read and interpret that data for making better trading decisions. 

1. Level 2 stock data provides 4 key insights 

The first thing is to know that Level 2 data provides you with four key insights – bid/ask spread, timing, market depth, and liquidity. 

Bid/ask spread

In fact, Level 2 data is the expanded version of Level 1 data. How so? Because it expands the information given in Level 1. For example, Level 1 provides you with the highest bid/ask price (the highest and the lowest price quoted for a particular stock or instrument). Conversely, Level 2 data offers multiple bid/ask prices. They may be 5, 10, or more depending on the exchange, you are getting data from. Similarly, you also get bid/to ask sizes associated with their prices. 

Now, what is the bid/ask spread? It is actually the difference between the bid and ask price of a stock. In simple words, spread indicates the difference between the prices at which you can buy or sell stock or any other instrument. So, what is the use of bid/ask spread? It helps you determine the liquidity associated with a particular stock or instrument. 

Liquidity

Liquidity, as you already know, is an important factor in trading. It helps traders determine how many stocks are available for common investors for trading. However, in the Level 2 stock data feed, we slightly change the concept. Here liquidity refers to the total number of buying and selling orders. How fast these orders get fulfilled and are replaced by new orders is even more important here.

Market depth

What is market depth? It is the measure of supply and demand for a particular instrument. Market depth tells you the level of interest and demand for a particular instrument. When you look at the number of open buying and selling orders, you can easily determine the liquidity of that specific stock or investment.

Timing

Finally, Level 2 stock data also helps in determining the timing of your trades. How so? By looking at market depth and liquidity. For example, if you observe that lots of buying and selling orders are being speedily fulfilled, you can find out the best time to enter or exit your own trade.

Why do investors use Level 2 stock data? 

Investors use Level 2 stock data because of multiple reasons. 

  • Investors can use Level 2 data to differentiate between different market players such as retail and institutional investors. When they know the market makers, they can identify their biases. Thus, they use this data to prevent traps created by influencers. 
  • Trading with the trend is a successful trading strategy. Investors keep an eye on Level 2 stock data to determine where the market trend is heading. Thus, it helps them utilize their strategies in the best possible way. 
  • Level 2 data also enable investors to understand when a new market trend starts or ends. Thus, they can trade with the edge and make significant gains. 
  • As we have already discussed, Level 2 data also helps investors understand several aspects of a particular stock. For example, they can identify liquidity and market depth. Additionally, they can also time their trades perfectly using Level 2 quotes.

However, if you are not an advanced or active trader, you don’t need to gain access to and interpret Level 2 stock data. In fact, you can trade successfully without it. Whereas, advanced traders may find additional information useful as they have strategies that rely on intra-day data. Simply put, if you have small capital for trading, such as $1,000, Level 2 stock data isn’t of much significance. Conversely, if you have $50,000 to invest, it may prove very useful because of the factors we discussed a short while ago.

The wrap-up

Level 1 stock data is the basic type of market data available to investors. It helps them analyze the market using information such as best bid/ask size, last price, and volume. This is the basic data. On the other hand, Level 2 stock data expands this basic data and presents more detailed information. For example, Level 1 provides you with the highest and the lowest price quoted for a particular stock or instrument. Conversely, Level 2 data offers 5,10, or more bid/ask prices and bid/ask sizes associated with their prices. So, Level 2 stock data is much more detailed and can help understand several aspects. Investors use it in many ways according to their needs and requirements. However, it is more useful for big players only as compared to beginners or traders with smaller capitals.

Russell Crane

Russell Crane

Russell is an Algorithmic & Technical Analyst Trader @ PatternsWizard.
His passion is to share his knowledge about TA, patterns & more. Why hope for your trading to work when you can precisely know the performance stat of every pattern?

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