Level II generally refers to a trading service that provides real-time access to market depth data for stocks or other securities. This data provides more detailed information than Level I data, which only shows the best bid and ask prices for a security.
Level II data typically includes the following:
- Bid and ask prices: The highest and lowest prices at which traders are willing to buy or sell a security.
- Market depth: The number of shares available at each price level.
- Market makers: The traders responsible for making markets in a security.
- Time and sales: A record of all trades executed for a security, including the time of the trade, the price, and the size.
Level II data can be used by traders to gain a better understanding of the supply and demand dynamics of a security, and to make more informed trading decisions. Some trading platforms offer Level II data as a subscription service, while others provide it as part of their standard offering.
To use Level II data, traders typically need to have a trading account with a broker that offers access to Level II data, as well as a trading platform that can display the data in real-time. Traders may also need to pay a fee to access the data, depending on their broker and trading platform. Once they have access to the data, traders can use it to monitor market activity, identify potential trades, and execute trades more efficiently.
Typical example of Level II
In below is example of how a trader might use Level II data:
Let’s say that a trader is interested in buying shares of Company ABC. They access Level II data on their trading platform, which shows them that there are currently 10,000 shares available for sale at a price of $50 per share. However, there are only 2,000 shares available for sale at a price of $49.50 per share.
The trader interprets this as a sign that there is strong demand for shares of Company ABC at the current price, and that the price may soon rise. They decide to place a buy order for 1,000 shares at $50, hoping that the price will continue to rise.
A few minutes later, the trader sees that the price has indeed risen to $51 per share, with only 5,000 shares available for sale at that price. They decide to sell their shares for a profit of $1 per share, and exit the trade.
In this example, the trader used Level II data to gain a better understanding of the supply and demand dynamics for shares of Company ABC, and to make a profitable trade. Without access to Level II data, they may have been less informed about the market activity and made a less profitable trade.