What Is Level 2 Market Data?

Information lies at the heart of investing and trading — information on companies and how they’re performing, the prices of individual stocks and how other investors are playing the market In light of this fact, Level 2 market data can be a valuable tool for helping you make more informed trades.

Understanding Level 2 Market Data

Level 2 market data gives investors information about trading volumes, multiple bid and offer prices.

Typically, day traders and high-volume traders are the ones who access Level 2 data most frequently because they rely on it for technical trading, a trading style where the investor makes their entry and exit decisions based on market prices and other technical information.

Technical trading is distinct from fundamentals trading, which is the practice of making investment decisions based on the business of the underlying company and other aspects of the industry and the economy at large.

Level 2 data is essentially an order book showing information on Nasdaq Stock Market stocks. It shows lists of the ask prices and current best bids from market-makers and general participants alike. This information can provide traders with helpful information, such as awareness of price actions.

Levels 1, 2 and 3 Market Data: What’s the Difference?

Level 1 market data offers basic data to traders and investors by displaying the highest bids and lowest ask prices for various securities in real time. It also contains information on last price, bid and ask sizes and volume. Level 1 market data is generally sufficient for investors like position traders and swing traders.

Level 2 data has everything Level 1 data has and more. Level 2 data builds on the information found in Level 1 data by including market depth. Market depth can be described as real-time data that displays the measure of supply and demand for liquid, tradeable assets. This market depth reveals critical information such as high bid prices and low ask prices, but it also shows the full depth of displayed orders on the market, including the quantities of each individual bid as well as who is making the trades. 

Therefore, this level of information is more valuable than Level 1 market data because it shows how much assets are worth, who is trading them, and in what quantities. The market depth of Level 2 data gives traders a more detailed, granular look in real-time at the order book of individual securities, which can make it useful for some day traders and high-frequency traders. 

Level 3 market data isn’t open to the general public. Instead, it’s only available to market-makers registered with Nasdaq. Level 3 market data allows these professionals to execute orders, provide pertinent market information and enter quotes.

The Importance of Level 2 Market Data

Level 2 market data offers essential insights into how the stock market is moving, giving investors an understanding of how much assets are worth, who’s interested in them, how much they’re being traded for and who’s doing the trading.

Day traders rely on lots of different kinds of information to inform their strategies, and one key consideration is when certain market participants begin buying and selling assets. Knowing how much of an asset is live on the market is also highly valuable.

Day traders may also use Level 2 data to study available lists of competing offers to understand and predict how the asset price will move in the immediate future.

If Level 2 data shows that the big transactions of a particular asset are trending in the direction of the ask price, traders can take this as a sign that the price is likely to drop. But if the ask prices remain high, it could indicate that the asset is rapidly gaining short-term strength.

4 Insights to Gather from Level 2 Market Data

Here are four important insights you can glean from Level 2 market data.

1. Market Depth

The more buy and sell orders there are for a given security, the greater the market depth. This depends on the orders being evenly dispersed around the security’s market price.

Market depth data allows you to evaluate and predict where an individual security’s price appears to be heading.

2. Liquidity

Liquidity, sometimes called marketability, determines how rapidly shares of an asset can be sold and bought without having a significant impact on the price of the security. The easier it is to buy and sell, the more liquid the asset is.

Cash is a great example of a liquid asset. To get value out of cash, you don’t need to exchange it or do anything to it because it’s already in its most liquid form. It’s easy to trade cash for other assets quickly and efficiently.

Cars, on the other hand, are good examples of illiquid assets. Although they may be valuable, you must wait for the right time to sell them to get a good price. If you need to sell a car fast, you’re at the mercy of whoever is willing to buy so you’ll likely have to settle for a lower price.

With enough sellers and buyers on the stock market, transactions can occur more easily, which translates to higher market liquidity.

3. Timing

Market timing describes moving money around based on forecasted methods.

Traders use market timing as a tool to help predict fluctuations in the market so they can enter or exit trades hoping for a profit.

Market timing is one of the main areas of focus for traders who actively manage their investment strategies. Many traders disagree about whether it’s possible to successfully time the market, but generally agree you should pay attention to it.

4. Bid-Offer Spread

Bid-offer spread, also known as the bid-ask spread, is the difference between the bid price and the ask price of the same asset.

The bid-offer spread has real-world consequences because it can cost a significant percentage of the trade’s value.

Learn to Trade Using Level 2 Market Data

Here’s how you can learn to trade using the information available through Level 2 market data.

1. Learn How the Market Data Works

The information found in this article is but the briefest summation of Level 2 market data and how it operates. Before making trades based on Level 2 data, you should have a firm grasp of how all the elements of market data work, both individually and together.

More specifically, you should research the following:

• Last price
• Best bids
• Ask prices
• Volume

You should also know how to correctly interpret Level 2 market data before making predictions based on it. Look for stock trading apps that will include a detailed library full of information on trading and investing.

2. Consider Opening a Brokerage Account

Now that you feel more confident about analyzing market data to your advantage, consider opening a brokerage account. Here are some things to keep in mind when doing so.

First, what are the commissions and fees associated with the account? If you choose to work with a full-service brokerage, you’ll likely have to pay high trading commissions along with potential account management fees.

Next, consider your trading style. If you’re particularly interested in Level 2 data, you’re likely more of an active trader. As such, you may want to explore an account with low fees that would allow you to trade as much as you like.

Finally, look for a brokerage account on a platform that offers useful tools and strategies to help you advance as a trader, like an online library or blog with educational resources on the stock market.

Level 2 Market Data can be a Valuable Tool

Market data can be intimidating, especially when you’re getting started with trading and investing. But with the right education and a little experience, you can easily interpret Level 2 market data and start using it to help become a more informed investor. 

Frequently Asked Questions