Level 2 market data reveals the full depth of the order book, showing all pending buy and sell orders at every price level. This information helps traders understand supply and demand dynamics beyond what basic quotes provide.
Understanding Level 2 Data
Level 2 data includes:
- Multiple price levels: All bids and asks, not just the best
- Order sizes: Number of shares at each price level
- Market maker IDs: Who is providing liquidity
- Real-time updates: Changes as orders are added or removed
Level 1 vs Level 2: Level 1 shows only the best bid and ask. Level 2 shows the entire order book depth, revealing where large orders are waiting.
Reading the Order Book
The order book displays bids on the left and asks on the right:
- Bids (buyers): Listed highest to lowest price
- Asks (sellers): Listed lowest to highest price
- Spread: Gap between best bid and best ask
- Size: Number of shares at each level
Using Level 2 for Trading
Identifying Support and Resistance
Large orders create temporary support and resistance:
- Big bid wall = potential support level
- Big ask wall = potential resistance level
- Watch if these orders hold or get absorbed
Gauging Supply and Demand
- More size on bids = buying pressure
- More size on asks = selling pressure
- Imbalance can predict short-term direction
Improving Execution
- See available liquidity before placing orders
- Avoid placing market orders into thin books
- Time entries for moments of better liquidity
Order Book Example
Stock XYZ:
Bids: $50.00 (5,000), $49.95 (2,000), $49.90 (10,000)
Asks: $50.05 (1,000), $50.10 (3,000), $50.15 (15,000)
The large bid at $49.90 suggests strong support. The large ask at $50.15 may cap upside temporarily.
Limitations of Level 2
- Hidden orders: Iceberg orders show only a fraction of true size
- Dark pools: Large institutional orders execute privately
- Spoofing: Fake orders designed to mislead
- Speed: The book changes rapidly
Best Practices
- Combine Level 2 with chart analysis
- Watch Time and Sales for actual executed trades
- Focus on liquid stocks where Level 2 is more reliable
- Be skeptical of very large orders until proven real
Track Your Trading Performance
Pro Trader Dashboard helps you analyze your trades regardless of the data tools you use.
Summary
Level 2 market data provides valuable insight into supply and demand at different price levels. Use it to identify support and resistance, gauge order flow, and improve execution. Remember its limitations including hidden orders and spoofing. Level 2 is most useful for active day traders in liquid markets.