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Understanding Level 2 Quotes
There’s crucial trading knowledge that can help you boost your trading: Level 2 quotes.
What are Level 2 quotes?
Quick Summary: Level 2 quotes are an inside track to the traders behind a stock’s price activity — who’s buying and who’s selling and at what price. You can use that information to help determine how a stock’s direction will change in the near future.
I know — it looks complex at first glance. But don’t worry. Once you understand what you’re looking at, it’s absolutely useful to making more successful trades.
In this post and infographic, I’ll break down Level 2 quotes for you. You’ll learn how to use them to help you make smarter and better-informed trading decisions.
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What Are Level 2 Quotes?
Level 2 stock quotes show the full order book for a given stock — or the price action.
It’s basically a ranked list:
The best bid and ask prices from market participants (more on market participants in a bit).
Level 2 quotes give you detailed insight into the security’s price action, including the market depth.
Reading a Level 2 Quote
When you look at a Level 2 quote, you’ll see a window with two sections: bid/buy and ask/sell.
- Bid/buy is typically on the left and represents traders trying to buy the stock. It shows the total number of shares that buyers wish to purchase at the corresponding price.
- The bid side is arranged in descending order, with the highest bids at the top and lower bids following below.
- The right column, usually ask/sell, shows the traders trying to sell the stock. It lists the total number of shares that sellers wish to sell with corresponding prices.
- The ask side is arranged in ascending order: the lowest ask is on top and higher prices follow.
Time Sales Box
The time sales box is kind of like the order log.
Every transaction is reported in this box — the price, quantity, time, and electronic communication network (ECN).
This helps you determine which direction the stock is likely to move in.
Let’s look at exactly how you can use this information …
If a lot of trades are executed when a buyer agrees to the seller’s price, it’s generally a good indicator that the stock will move up a bit.
On the buy side, you might see several orders getting filed. This can mean that the stock is heading lower, since sellers are rushing to get rid of their shares at lower prices.
When reading a Level 2 quote, you’ll also see some strange four-letter notations. Those notations are code for different market participants. Use this data to see who’s getting in on the action.
Market participants can usually be recognized by the four-letter ID that appears on Level 2 quotes. (This isn’t always cut and dry — we’ll get to that in a bit.)
For example: You’ll see MLCO for Merrill Lynch, JPHQ for JPMorgan, MSCO for Morgan Stanley, GSCO for Goldman Sachs, and so on.
Now we can take market participants and break them down into three key types:
- Market Makers: Market makers can literally make the market by providing liquidity in the marketplace. They’re required to buy when nobody else is buying and to sell when nobody else is selling.
The most important market maker is called the ax. You can figure out who the ax is by watching the Level 2 action for a few days. The market maker consistently dominates the price action.
- Electronic communication networks: ECNs are computerized order-placement systems.
Anyone — including large institutional traders — can trade through ECNs. That’s where Level 2 quotes can get tricky: The ax or key market maker can use ECNs to hide their actions. That can make it difficult for you decipher their movements.
- Wholesalers: Many online brokers sell their order flow to wholesalers. These wholesalers then execute orders on behalf of online brokers.
Level 2: The Good and the Bad
Like any other analysis tool, Level 2 quotes have their good and bad points. Let’s look at a few on each side:
- Indicator of buying action. By looking at the type of market participants involved, you can tell what kind of buying is taking place within a particular security: retail or institutional. Usually, one or the other is dominant.
- Look at the ECN order sizes for irregularities. Market makers can try to hide their actions behind ECNs, but you can beat them at their own game.
If you look closely at order sizes, you can see when institutional players are trying to keep their buying activity quiet (that can mean a buyout or accumulation is taking place).
- Look to the Ax for guidance. By trading with the ax when the price is trending, you can greatly increase your odds of a successful trade.
- Find the bid/ask sweet spot. You can tell when a strong trend is about to come to an end — look for trades that take place in between the bid and ask.
That’s because these trades are often placed by large traders who take a small loss to make sure that they can get out of the stock in time.
- Market Maker trickery. Market makers can be tricksy little hobbits. They can hide their order sizes by placing multiple small orders. They do that to unload or pick up a large order without tipping off other traders — thus scaring them away.
- Price manipulation. Market makers can place a large offer to get short sellers on board, only to cancel the order and place a large bid. This forces short sellers to exit their positions, causing the price to rise. Guess who reaps a quick profit? Yep. The manipulator.
- ECN diversion tactics. Market makers can also hide their actions by trading through ECNs. Remember: ECNs can be used by anyone. It’s often difficult to determine if large ECN orders are retail or institutional.
StocksToTrade for Level 2
StocksToTrade can help you make the most of Level 2. On the platform, we offer Level 2 quotes.
You can even install a Level 2 widget to maintain a full view of the action on a stock.
You’ll find real time information about the quotes and the Market Makers involved, as well as the buy and sell price of the stock in question.
You’ll also find a volume bar that shows the most recent trades, with the bar height representing the position size.
Level 2 quotes can be immensely helpful in deciphering the specific price action of a particular stock.
- Who’s buying?
- How much?
- At what price?
The more you know about the price action, the better you can determine if the stock suits your individual trading strategy.
And like I say with any trading tool or strategy … never use just one to make a buy or sell decision. Level 2 quotes are no different.
Use them as part of your overall research when developing a trading plan.
Do you use Level 2 quotes? Share your success stories! Leave a comment and tell us about your experience.