Level 2 Tutorials
What is Level 2:
Level 2 (also known as Market depth, or Order Book) is by far provide the most comprehensive and in depth set of data available in the market after the RSP. Level 2 provide a deeper view into the stock’s trading action, it help traders/investors see the best bid and ask (explained later on), as well as the best bid and ask by all other market participant. This will ensure a well-informed trading and investing decision, through high visibility of the factors and trends underlying price movements, all updated in real time.
Bid, Ask and Spread:
Bid Definition: A stock's bid is the price a buyer is willing to pay for a stock. Often times, the term "bid" refers to the highest bidder at the time.
Ask Definition: The ask price is the price a seller is willing to sell his/her shares for. Often times, the term "ask" refers to the lowest selling price at the time.
Spread Definition: The spread is the difference between the ask and the bid, calculated by subtracting the bid price from the ask price. For example, if a stock had a high bid of $10.50 and a low ask of $10.60, the spread would be $0.10.
The bids are on the left side of the level 2 screen. The price difference between the best bid and best ask is known as the spread. A tight spread usually has only a one-penny difference. The larger the price difference makes for the wider the spread. Thin stocks tend to have wider spreads and thick stocks have tight spreads. The more expensive a stock trades, the wider the spreads can also be as liquidity thins out. Stocks like CSCO in the $20s usually have one-cent spreads whereas a stock like PCLN priced in the $1200s will have spreads as wide as a $2.00. The spread can be a cause for slippage. Tighter spreads favor market orders whereas a market order on a wide spread could reap a lot of slippage.
Supply Vs Demand
The level 2 window usually displays the level 1 information at the top portion including last price, level 1 inside bid and ask, last trade and intra-day high and low. Just below the window is split into two parts. The left side of the level 2 window contains the bids usually color by price level. The best/inside bid is displayed along with the market makers or ECNs with their representative share size and time of the post. This side represents the demand.
The right side contains the supply, which include start at the best ask/offer price, size and time of post. The price levels are segments by color/shade in order of lowest price at the top (best ask/offer) on down to the highest ask prices. These are constantly changing as the price of the underlying moves up and down. Traders should keep in mind that the level 2 screen is not always representative of the true supply and demand.
Often times there may only be a 100 share size shown on the level 2 but the real size could be much larger. These are called reserve prices, meaning they will fill at 100 shares at a time but the true amount is the reserve order, which must be filled before the price level can clear. There are also hidden orders, which do not display on level 2 screens, however, they will show up on the time and sales window when they are executed. The purpose of these quotes is to minimize market impact and not disturb momentum. If a stock is climbing, then it’s important to maintain that rising momentum by not placing too much size on ask or else the bidders may pullback to wait for a cheaper price since the ask size may represent and oversupply. Placing a 100 share reserve order to sell 5,000 shares makes a much smaller impact than placing the full 5,000 shares on the ask.
Level service providers