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What Is Level 2 Market Data?

Views 1332022.08.03

Key takeaways

The Level 2 market data contains detailed information about the price, the volume, the bids and offers of a stock.

The level 2 market data shows the market depth, the liquidity, the stock timing and the bid-offer spread of a stock.

The Level 2 market data goes deeper into the trading information than Level 1 data when traders determines their stock trading strategy.

Understanding the Level 2 Market Data

Market data or 「order book」 provides investors with key market data and insights regarding the bid scope and price levels of quotes submitted to the exchange. This data is a critical component for any investor.

When it comes to making smart trades on the stock market, data is the key to success. 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 will be able to predict the stock behavior and make wise decisions that grow your portfolio.

As you begin to explore market data, you will likely hear terms related to different levels of market data.

We will explore what you need to know about the value of this data, what it can uncover, and how you can use this data to improve your investing strategy.

As you start looking through your Level 2 quote, you will see some key active trader participants. There are market makers who will be both bidding and selling on behalf of investors. They often work for large brokerages. Some bids come from wholesalers interested in these active stocks.

Knowing who makes the bid can help some investors, such as day traders, who like to track specific types of market participants and their trading patterns.

You will also see electronic communication networks (ECNs), like NYSE Arca, which are order placement systems.

How do investors use Level 2 market data?

Investors use Level 2 market data to provide context to the numbers you can see in Level I 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, making sure that the investor can predict how they will move is critical to success.

There are four main areas in which investors can gain insight and information about stocks from Level 2 trading data.

The market depth

The Level 2 market data provides investors with 40 levels of the best bids and offers that have been made upon a particular stock. The investor 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, investors will 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.

The liquidity of the stock

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 the Level 2 market data, investors 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 for a buyer.

The stock timing

Particularly when dealing with small margins in buying and selling stocks, knowing how to time the purchase and when you make the sale can play a critical role in success. If an investor 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 can help investors gauge their timing and place their order at the best possible moment. Investors want to make sure they time their trades optimally.

The bid-offer spread

The Level 2 data can also help investors better understand the bid-offer spread on a given stock. The bid-offer spread describes the measurement of 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 will 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.

With Level 2 market data, since you can see the range of highest bids and offers, you will understand the genuine spread between bids and asks, which can help you better gauge the stock's health and if you want to add it to your portfolio.

How does Level 2 market data differ from Level 1?

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 people to use when they buy stocks. For many investors, it suffices and can help them guide their purchases. When you look at this level of data, you will encounter the following points:

The bid price, which is what the buyer wants to pay

The bid size, or the number of shares requested within the given order

The asking price, which dictates the lowest price that the stock sellers have indicated they will sell for

The last price, or the price at which the most recent order was completed at

The last size, which is the order size requested during the last stock trade.

While Level 1 market data is certainly helpful for the novice investor to provide the current market data, Level 2 market data is advantageous to the experienced investor to provide the WHY behind price movements.

The Level 2 data goes deeper into this information and provides insight and context that investors can use when determining their stock trading strategy. 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. When investors look closely at this information, they will better understand how the stock performs, which can help them fine-tune their offers and purchases to increase their profits.

Build your investments with Level 2 market data

Stock traders have 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.

For customers who turn to the moomoo app and the investment platform from Futu Inc., this level of market data will be at your fingertips. By offering customers access to Level 2 market data, we know that we empower them to make the best possible decisions for their portfolios.

Create a profile and download our trading app if you want to start building a portfolio for your investments and access information and insights that Level 2 market data can offer. Get started today and improve your trading strategies.

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