Level II is a general term for a range of stock data that can provide enormous insight into a stock's price action. It can tell you what type of traders are buying or selling a stock and where the stock is likely to head in the near term.
Level II quotes can also help you better understand open interest in a given stock as well as market depth and momentum.
Level II data is available by subscription from Nasdaq.
Key Takeaways
- Level II displays the order book for Nasdaq stocks, including the best bid and ask prices by various market makers and other market participants.
- Level II shows you who the market participant is that's making a trade, whether they're buying or selling, the size of the order, and the price offered.
- The players in the marketplace are market makers,ECNs (computerized order placement systems), and the wholesalers that work with online brokers.
- Market makers buy and sell at all times, ensuring liquidity in the market.
What Is Level II?
Level II is essentially the order book for stocks that trade on the Nasdaq exchange. Orders are placed through many market makers and other market participants.
Level II displays a ranked list of the best bid and ask prices from each of these participants. This gives you detailed insight into the price action. Knowing exactly who has an interest in a stock can be extremely useful, especially if you're day trading.
Here is what a Level II quote looks like:
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This tells us that UBS Securities is buying 5,000 shares of stock at a price of 102.5. The figure for number of shares represents the size of the current order, which you determine by multiplying by 100 (50 x 100 = 5,000).
Players in the Marketplace
There are three types of players in the marketplace: market makers, electronic communication networks, and wholesalers.
Market Makers (MM)
These are the players who provide liquidity in the marketplace. They're required to buy when nobody else is buying and sell when nobody else is selling. They "make the market."
Electronic Communication Networks (ECN)
Electronic communication networks are computerized order placement systems. Anyone can trade through ECNs, even large institutional traders.
Wholesalers (Order Flow Firms)
Many online brokers sell their order flow to wholesalers. These order flow firms then execute orders on behalf of online brokers, usually retail traders.
Each market participant is recognized by the four-letter ID that appears on Level II quotes. Here are some of the more well-known participants.
| GTSZ | GTS Securities, LLC |
| CDRG | Citadel Securities, LLC |
| MLCO | BofA Securities, Inc. |
| CANT | Cantor, Fitzgerald & Co. |
| JPMS | J.P. Morgan Securities LLC |
| GSCO | Goldman Sachs and Company |
| FBCO | Credit Suisse Securities (USA) LLC |
| PIPR | Piper Jaffray & Co. |
The Most Important Market Maker
The most important market maker is called the ax. They control the price movement of a given stock. You can determine which market maker is the ax by watching Level II activity for a few days. It's the market maker who consistently dominates the price action.
Many day traders make sure to trade with the ax because doing so typically results in a higher probability of trading success.
Why Use Level II?
Level II quotes can provide a lot of information about a given stock:
- You can learn what kind of buying is taking place (retail or institutional) by looking at the type of market participants that are involved. Large institutions don't use the same market makers as retail traders.
- You can discover when institutional players are trying to keep their buying quiet if you look at ECN order sizes for irregularities. These can mean that a buyout or accumulation is taking place.
- You can greatly increase your odds of a successful trade by trading with the ax when the price is trending. The ax provides liquidity (but its traders are out there to make a profit just like everyone else).
- You can get a good idea of when a strong trend is about to come to an end by looking for trades that take place between the bid and ask. These trades are often placed by large traders who take a small loss to make sure that they get out of the stock in time.
Tricks and Deception
While watching Level II data can tell you a lot about what's going on in the market for particular stocks, be aware that there's also the potential for a lot of deception. Some market makers use tactics to hide their trades and actions to throw other participants off.
Here are a few of the most common tricks played by market makers.
Hiding Order Size
Market makers can hide their order sizes by placing small orders and updating them whenever they get a fill. They do this to unload or pick up a large order without tipping off other traders and scaring them away. Nobody is going to attempt to push through a 500,000 share resistance but traders may still think it's a beatable barrier if a persistent 10,000 share resistance is seen.
Order Sizes and Timing
Market makers occasionally try to deceive other traders using their order sizes and timing. JPMS may place a large offer to get short sellers on board, only to pull the order and place a large bid. This will force the new shorts to cover as day traders react to the large bid.
Trading Through ECNs
Market makers can also hide their actions by trading through ECNs because ECNs can be used by anyone. It's often difficult to tell whether large ECN orders are retail or institutional.
What Is a Buyout in Trading?
A buyout occurs when an individual or private equity fund acquires the controlling interest in a company, typically representing 50% or more of ownership. It's referred to as a "leveraged" buyout if the individual borrowed money to make the purchase.
What Is a Short Seller?
A short seller sells a stock that they don't own. This is accomplished when an investor enters a short sale order in a margin account with their brokerage firm. They're effectively borrowing the stock for the purpose of selling it.
The short seller can then actually buy the stock and realize a profit if its price plunges. But they'll lose money if the price goes up.
What Is a Fill?
A fill is a fully executed order for a security. The order has been filled when the price paid fills or meets the price of the order. This doesn't happen with every trade because numerous conditions must be met to allow it. The fill depends on how the order is placed. A market order is filled when a security hits the best available price. Limit orders involve filling at a specific price.
The Bottom Line
Level II stock data can give you unique insight into a stock's price action, supply and demand, and levels of support and resistance. But there are also a lot of things that market makers can do to disguise their true intentions.
The average trader shouldn't rely on Level II quotes alone. They should use Level II in conjunction with other forms of analysis when determining whether to buy or sell a stock.
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
FINRA. "Market Centers."
Institutional Limited Partners Association. "Leveraged Buyout (LBO)."
IG Group. "What Is a Fill?"
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