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What is Level 2 Market Data?

Views 43KApr 9, 2024
How to read level 2 market data - using an order book for trading strategies -1

Build your trading strategy with level 2 market data

Data is the key to success when it comes to making smart trades on the stock market. The more you know about the activity of a given stock, how the company performs, and how the stock responds to different market situations, the better you may be able to predict the stock's future behavior and make wise decisions that grow your portfolio. These data-driven decisions help you make sound decisions based on research not emotions.

As you begin to explore market data, you will likely hear about both level 1 and level 2 data. Some of the key things to learn are:

• What is level 2 market data?

• Level 1 data vs. level 2 market data

• How to use level 2 data

We will explore what you need to know about why level 2 data matters, what it can uncover, and how you can use this data to improve your investing strategy.

What is Level 2 Market Data?

Market data, also called an order book, provides investors with key insights regarding the bid scope and price levels of quotes submitted to an exchange. This data is a critical component for many trading strategies.

Picture of level 2 market data in the moomoo app
Picture of level 2 market data in the moomoo app

Images provided are not current and any securities are shown for illustrative purposes only.

As you start looking through a Level 2 quote, you will see electronic communication networks (ECNs), like NYSE Arca, which are order placement systems.

In addition, you will see important data like:

• Bid prices, which is the most that the buyer wants to pay

• Bid sizes, or the number of shares requested within the given order

• Asking prices, which dictates the lowest price that the stock sellers have indicated they will sell for

• Last prices, or the price at which the most recent order was completed at

• Last sizes, which is the order size requested during the last stock trade

In the overall market, level 2 data will show you the bid-ask ratio and best bid and offer (BBO).

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Moomoo's partnership with Nasdaq offers users free premium market data for up to three months! This includes powerful Level 2 quotes from Nasdaq TotalView with over 20x liquidity than standard quotes, and forecasted opening and closing price information, helping users make more informed trades.

Claiming period: April 03, 2024, 04:00 AM – April 31, 2024, 11:59 PM

Free trial period: May 01, 2024, 04:00 AM – July 31, 2024, 11:59 PM

Level 1 vs. level 2 market data

The first type of data that investors encounter is typically level 1 data, as you can find this data on a variety of free websites. Level 1 data provides an outline or overview to use when buying and selling stocks. For some beginner or long-term traders, it suffices and can help them guide their purchases.

While Level 1 market data is certainly helpful for traders not concerned about small price changes, Level 2 market data helps experienced and short-term traders like day traders by offering the WHY behind price movements.

Level 2 data shows what is called the "order book" for an asset, or the list of orders that are placed for buying and selling a particular asset over time. Rather than just seeing the most recent price, they can see as many as 5-10 of the most recent bid sizes, including orders that have been placed but still need to be filled. This deeper detail includes:

• The highest current bid prices in order from highest to lowest. Each entry shows which investor placed the order, how many they ordered, and the price they paid.

• The lowest current ask prices in order from lowest to highest. Each entry shows who placed the order, how many were purchased, and at what price.

When traders look closely at this information, they may better understand how the stock is currently peroforming, which can help them fine-tune their strategies to capture smaller gains. Investors using level 2 data can tell if retail or institutional traders are trading and when institutional buyers are trying to keep their actions quiet. In addition, this deeper information can help individual investors trade with the ax when the price is trending and spot trades between the bid and ask to tell when a strong trend may be about to end.

How to use Level 2 market data

Traders use level 2 market data to provide context to the numbers in level 1 data. Those who want to make money from small share price changes and those using high-frequency traders know the value of understanding the context of trades. When the stocks only move by a small amount before they get sold again, being able to predict how they may move in the future is critical to success.

There are four main features that traders look at to gain insight and information about stocks from level 2 trading data.

1. Market depth

The level 2 market data provides multiple levels of the best bids and offers that have been made for a particular stock. Traders can then tell how many buy and sell offers exist at the different price points by looking at this information. For example, if there is a significant gap between the highest bid and the next highest bid, this indicates that the stock might not be particularly strong. In instances like this, where the highest bid is significantly higher, the Level 1 market data doesn’t tell the entire story. Remember that the Level 1 data only shows the highest bid, which would be insufficient in this situation.

By looking closely at the actual market depth data, traders may better understand the value that this stock offers for their purposes and determine whether they want to make an offer and where that offer should realistically fall.

2. Stock liquidity

The liquidity of the stock indicates how difficult it would be to sell a given stock. A stock with low liquidity will be hard to sell and might result in greater financial loss for the stockholder. They may struggle to offload it at the price they want because they will struggle to hit target prices.

With level 2 market data, traders can see how quickly orders get filled and replaced by new investors interested in this stock. This provides insight into the stock's liquidity and whether or not it will be a good portfolio addition.

3. Trade timing

Knowing how to time your purchase or when you want to make a sale can play a critical role in success — especially when dealing with small margins. If a trader hesitates, the price can potentially fluctuate in a matter of seconds. The additional information in Level 2 data regarding the number of buyers and sellers there are and the range of prices they contain may help traders gauge their timing and place their order at the best possible moment. For example, they can see how quickly the market is moving and know how focused they need to be. They an also see if the market is moving too fast for their tastes and wait to enter.

4. Bid-offer spread

Level 2 data can also help traders better understand the bid-offer spread on a given stock. The bid-offer spread can show the difference between the price at which you can expect to buy a stock and the price at which you can sell it. When this spread remains low, indicating that the buying and selling prices remain relatively close, the stock is typically more liquid. You may have an easier time selling the stock when you want to, as the prices for buying and selling seem relatively stable. On the other hand, if you have a large spread, you will likely see less liquidity for those investments.

Key Takeaways

Stock traders gain a wealth of information through level 2 market data. It helps investors of all levels better understand the stocks they want to buy and how they can uncover new opportunities that they might not have seen with only the level 1 market data. Level 2 data can also help traders to avoid making bad trading decisions based on false signals based on limited level 1 data.

Build your portfolio with moomoo's free Level 2 market data

When you trade with moomoo, real-time level 2 market data will be at your fingertips. We empower our users to make the best possible decisions for their portfolios.

One area that sets our level 2 data features apart is our depth chart.

Image of level 2 order book depth chart on moomoo
Image of level 2 order book depth chart on moomoo

Images provided are not current and any securities are shown for illustrative purposes only.

While level 2 market data shows orders placed at each price, it can still be difficult for traders to quickly grasp the relative strength of buyers and sellers. A depth chart can better present prices and order quantities to help investors better undernstand supply and demand.

• The X-Axis indicates the price distribution of all orders

• The Y-Axis indicates the cumulative order numbers up to or down to a certain price (i.e., the number of orders currently needed to be filled for the stock to reach a certain price level)

Where the line is steep, it indicates that orders are concentrated at certain price level.

If you press on the depth chart, a crosshair woill show the price momooand cumulative order number at that specific point.

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Images provided are not current and any securities are shown for illustrative purposes only.

In the price levels below the depth chart, a line will appear to highlight orders priced between the best bid and ask.

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Images provided are not current and any securities are shown for illustrative purposes only.

These functions are incredibly helpful when you wish to buy a very limited number of shares, for example when purchasing expensive stocks.

Discover the benefits moomoo can give your trading strategy with free level 2 data* that is refreshed every 0.3 seconds and has up to 60 levels of bids and asks. Create a profile and download moomoo today to start building your portfolio with the detailed information and commission-free trading. Get started now and grow as you improve your trading strategies.

*Level 2 data is free to moomoo users that have an approved brokerage account with Moomoo Financial Inc.

Moomoo is a financial information and trading app offered by Moomoo Technologies Inc. In the U.S., investment products and services on Moomoo are offered by Moomoo Financial Inc., Member FINRA/SIPC.

Any illustrations, scenarios, or specific securities referenced herein are strictly for illustrative purposes. Past investment performance does not guarantee future results. Investing involves risk and the potential to lose principal.

Frequency Asked Questions
How to read level 2 market data?
Reading Level 2 market data requires a good understanding of market terminology, and an ability to interpret the data in the context of current market conditions.
1. Identify the market depth
2. Look at the bid-ask spread
3. Identify the dominant market makers
4. Pay attention to order sizes
5. Monitor changes in the data
With practice and experience, you can learn to read Level 2 data more effectively

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy.

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