Level 2 Stock Quotes – Improve Your Trading Performance

level 2 stock quotesA key trading tool of professional traders is Level 2 stock quotes – pricing information that is becoming easier for all traders to access. Stock quotes are provided in two formats – Level 1 and Level 2.  Nonprofessional traders use level 1 stock prices. Level 1 stock prices are based on the price of the last trade made.  The price and volume of shares traded is provided. Professional traders use Level 2 quotes.  Level 2 quotes show the buying and selling activity of all players in real time. Reading Level 2 stock prices is also called Tape Reading. The secret to trading like hedge fund managers and other pros is to learn how to read the tape, a technique day trading veterans use to profit from the stock market every day!

Level 2 stock quotes provide real time buying and selling activity. They are commonly used in stock trading. The best traders understand trading mindset and psychology.  The psychology of the market and thus the direction prices are likely to move in can often be ascertained by the underlying buying and selling activity.  We have all had the experience of hesitating and missing an opportunity to buy low or sell high before prices fall.  Level 2 price quotes can provide you with the market intelligence to make better buying and selling decisions.  Learn how to use Level 2 quotes and the few cents a share trading advantage here and there will quickly add up.

Level 2 stock quotes provide real-time pricing information. Technical analysis allows you to turn that information into trading strategies. A Beginners Guide to the Technical Analysis of Stock Charts will teach you how to identify and trade bullish and bearish patterns.  These are the same techniques that professional traders use.

Level 1 Stock Quotes – Example

Let’s say you are selling eggs at the farmer’s market each morning. Four shoppers are at your stand and as you shout out your price, you lower it until the first shopper says he will take 10 dozen eggs. You sell your eggs to the highest bidder. More farmers approach your stand and you begin to cry out the price of your last trade. You know the current price of eggs but you do not know what the other egg farmers are willing to pay for eggs.

Level 2 Stock Quotes – Example

Then, in 1898, the newly opened Chicago Butter and Egg Board begins to use an auction, or open outcry, system to sell eggs.  The board’s bidding system is based on real time prices, like Level 2 stock prices, which is basically the order book of all buys and sells during a given period.

You no longer sell eggs at the market but instead sell eggs, cheese, flour, candy and other goods as a local grocer. Then, you open 10 other grocery stores. You call a regional broker with your weekly egg order and agree on a price you are willing to pay. Your broker sends a representative to bid for eggs at the Chicago Butter and Egg market.

These representatives are called market makers (MMs) because they set the prices for eggs. Let’s say 10 market makers show up at the egg market, and they bid on behalf of brokers. They stand in a trading pit and cry out prices. When a seller offers eggs for sale, your MM will match the offer and buy your eggs. If he can, he will buy the eggs for even cheaper and make money on the spread between the price he pays at the egg market and the price you are willing to pay for the eggs. Open outcry bidding is an art. Your MM learns that every time Freddie the trader – who represents the largest egg buyer – puts his hand in his pocket, he raises his bid. Like Level 2 stock trading, you can see all bids and asks in real time.

Electronic Trading

Then the butter and egg board grows and becomes the Chicago Mercantile Exchange (CME). The CME starts to use an electronic trading system that works like a Level 2 stock quote system. All of the market makers who want to buy eggs are separately listed on the bid side of the screen.  The listing includes their name, the volume of eggs they want, and the price they are willing to pay.  On the bid side of the screen, other market makers list the volume of eggs they have available and the price they are asking.  The electronic system matches bids and asks.

Using the price information available from Level 2 quotes, your market maker can make predictions about the direction prices will move. Level 2 quotes represent all bid and ask quotes in the market. Say many traders are buying up eggs. Your market maker will buy immediately correctly guessing that if the supply of eggs is quickly bought up prices will rise.  Transparent buy and sell quotes allow us to make more informed buying and selling decisions, and thus more profitable trades.

Most trades today are made electronically through electronic communication networks (ECNs). This makes it even easier to see what other market makers are doing. Level 2 quotes are commonly used in stocks trading on NASDAQ, the NYSE, OTCBB and pink sheets. While Level 2 stock quotes have been traditionally available  to market makers, a number of sites claim to offer free Level 2 quotes.

Market Transparency

The biggest advantage of Level 2 pricing is that it provides stock price transparency. One can not only see prices changing in real time but, importantly, who is bidding what. All traders like to see what the large institutional traders are doing. When you see Freddie, the largest egg buyer, entering large bids at higher prices, you expect prices to move higher, so you quickly match an asking price before prices rise.

Professional traders watch for a number of signals and trends in Level 2 prices.

  • If  notably more ask than bid orders are being filled, the price trend is likely to move higher
  • If notably more bid than ask orders are being filled, the price is likely to fall
  • Do the same players come in and buy a stock when its price dips? This investor may be doing more than buying on the dips. The investor may be intentionally supporting the stock because its fund has a large position in it. Do not wait for this price to fall lower.

Technical Trading

Level 2 trades provide important market information for technical traders and day traders. Basic price information is shown – high, low, last price traded, open, close on the previous trading day, change in price and the volume traded.  Level 2 quotes also provide the real time price bidding behind the trades, which consist of the bids and asking prices. Bids show the prices that market participants are willing to pay from highest to lowest and the amount of shares they seek to buy. The ask price provides the number of shares available at a specified price from lowest to highest.  Traders no longer have to look across a trading pit to see what the big market makers are doing.

Technical trading training will help you get the most insight out of Level 2 stock quote information. Stock Trading Ninja and TechniTrader Leading Hybrid Indicator Trading show you how to use technical analysis indicators and understand pricing patterns to make better buy and sell decisions. Importantly, you will learn about big money market dynamics and what big money buying and selling activity indicates. How are the high frequency trading firms affecting pricing patterns? What new technical patterns are forming and what do they mean? How do different market conditions affect the indicators you use? Most technical trading systems integrate Level 2 quotes into pricing trend analysis making it easy to make more profitable trading decisions.