5 Ways to Use Level 2 Data to Help Strengthen Your Trading
You may know the expression: data is king. But you have to know how to use it.
For investors, understanding and utilizing current market data for a stock is one way they may embrace this when making trading decisions. Level 1 data may be their data of choice. Level 1 data is basic data that shows a stock’s bids and asks.
But other market participants may want more granular data for a more detailed picture. Level 2 data meets their needs by going further, enabling investors to analyze a stock’s depth in the order book, see trends, and more.
Read on to learn more about Level 2 market data, discover how to read Level 2 market data, and learn how to use Level 2 market data to help you make better informed trading decisions.
What is Level 2 market data?
Level 1 data, called Best Bid and Offer (BBO), is basic data that shows the best bid and ask price for a security. Level 2 data (Order Book) is data that shows the market depth of a security through the range of bid and ask prices of stock orders to be executed, trading volumes at each price level across exchanges, and market participants — in real time.
Why should investors use Level 2 data?
Level 2 market data offers information to investors on a stock’s momentum and market depth. It can also enable them to understand a security’s potential price trajectory through bid/offer spreads, time and sales of executed orders, and market participants.
From this detailed information, investors can potentially use it to make order entry and exit decisions from market prices and other technical information.
Keep in mind, there are downsides to using Level 2 market data as a strategy. Level 2 data can be complicated and challenging to understand, especially for novice investors. It can also be costly to access and because of this, some investors may not be available to use Level 2 data.
Five ways to use Level 2 data
Investors can use Level 2 market data to get more context and potential insights beyond Level 1 data. Let's explore five ways investors can utilize Level 2 market data to gather information and help make more informed trading decisions.
1. Interpret the bid-offer spread
Level 2 data can enable investors to glean a greater comprehension into a stock's bid-offer spread, which represents the difference between the price an investor can buy the stock and the price it can be sold. This can help them to navigate the financial markets, as they can see the depth of buy and sell orders, giving them a clearer picture of supply and demand for a particular stock.
A narrow bid/ask spread indicates a high demand for the stock. This means the market is more liquid and investors may have an easier time selling the stock if they choose to do so.
A wide bid/ask spread suggests that fewer people are actively trading the security. The lack of liquidity in the market might make it more challenging for investors to find buyers and sell their shares.
2. Examine market depth
Level 2 market data can offer investors a comprehensive view of the multiple bids and offers in the order book for a specific stock. This provides investors with a richer understanding of market activity, enabling them to anticipate potential price movements and manage their trading strategies accordingly.
At moomoo, we show up to 60 levels of bid and offer quotes, allowing investors to assess the number of buy and sell offers at different price points. Additionally, this data reveals the overall price trend of the stock.
Let’s dig a little deeper.
If there’s a notable disparity between the highest bid and the next highest bid, this can suggest a potential weakness in the stock price. Now, had an investor solely relied on Level 1 market data, this would have provided an incomplete picture since this data only displays the highest bid, and not the pending open orders like Level 2.
By analyzing this market depth data, investors can enhance their understanding and make more informed decisions about whether to place a bid or offer and at what price.
3. View stock liquidity
The liquidity of a stock refers to the ease with which it can be bought or sold without significantly impacting its price. A stock with low liquidity poses challenges when it comes to selling, potentially leading to greater losses as investors struggle to sell at their desired price.
Level 2 market data provides valuable information for investors by displaying the speed at which orders are executed and the subsequent new orders that replace them with new orders in the stock. This activity offers insights into the stock's liquidity, allowing investors to make more informed decisions about whether they should engage in a trade or wait to make portfolio changes.
4. See market participants
Wondering if retail or institutional traders are actively trading in a particular stock and how it might be affecting prices?
By utilizing Level 2 data, investors can help discern which of these players are doing so and determine which participants are setting a security’s price. Market makers, institutions, or a large investor may lead a particular stock’s price for a period of time and may be identified through a four-letter code in a quote.
Here’s an example. An investor reviews the order book of a stock they’re interested in trading and sees GSCO. This four-digit code belongs to Goldman Sachs and the investors can dig a little deeper to see if the firm is setting the current price on a stock by seeing how much stock has been placed into the market by this market participant.
The order book quote could look like this: Bid - GSCO – 102 – 100.
This quote shows Goldman Sachs has placed an order to buy 10,000 shares of a stock for $102. The number of shares is derived from Level 2 data showing volume in units of 100 (100 x 10 = 10,000).
Please note that while this can be helpful information, not all bid/offers will have an attribution of market participants. Therefore, investors cannot always tell who is placing the orders. Furthermore, it will limit an investor's ability to fully understand who is placing the orders, the potential reason for the trades, and the accuracy of an individual trader's decisions.
5. Determine trade timing
Timing can be everything, such as trading a stock with tight margins. Stock prices can fluctuate, and investors can miss opportunities if they don’t understand the current market.[MB2]
Level 2 data can provide additional insights, such as the number of buyers and sellers and the range of prices they offer. This information can help gauge the timing for a purchase or sale by identifying the different price points to consider when placing an order.
By monitoring how quickly the market is moving, investors can also help determine the level of focus required to watch the market. If it’s moving too rapidly for their liking, they can choose to wait for a more suitable entry point or set up an alert.
Inform your trading strategies with moomoo’s Level 2 data
Level 2 data is one of the many tools you can use to help create and enhance your trading strategies. One place where to get level 2 market data is through[MB3] moomoo,
Here are some features of moomoo’s real-time, in-depth Level 2 data that can provide you with insightful and intuitive information:
Refreshed data every 0.3 seconds
Up to 60 levels of bids and asks
Integrated with six order books: NASDAQ TotalView, NYSE OpenBook, NYSE ArcaBook, CBOE,and National quotation
Isn’t it time to gain deeper insights into market data to pursue your investment goals?
Disclosures
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This article is for educational use only and is not a recommendation of any particular investment strategy. Content is general in nature, strictly for educational purposes, and may not be appropriate for all investors. It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions. All investing involves risks.
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