Level 2 quotes aren’t something most investors use every day. That said, they can be a really powerful tool in helping you understand how a stock’s price might move over the course of a day.

In short, level 2 quotes give you a peek into the order book of whatever stock exchange the investment you’re looking at is traded on. You can see the individual orders in the queue waiting to be resolved, including the prices and quantities ordered.

You can also see who the market maker is. If you didn’t know, the market maker is the one who make sure there’s liquidity in the market. In other words, they’re required to buy when nobody else is buying, and sell when nobody else is selling. It’s kind of like having a float in a cash register – without it, business might unexpectedly grind to a halt!

Why Use Level 2 Quotes?

Level 2 quotes are useful to advanced traders for a few reasons:

• They give insight into who’s buying the stock – retail, or large institutions. Large institutions tend not to use the same market makers as retail traders, which makes it possible to tell who’s who by looking at the market maker for the trades in the queue.
• By looking for trades that take place between the bid and ask price, you can tell when a strong price trend is about to taper off.
• Large institutional investors often use Electronic Communications Networks to make trades, in an effort to keep their activity quiet. These trades are visible through Level 2 quotes. If you notice irregularities in the sizing of these ECN trades, it could mean that someone is trying to keep their behaviour quiet (maybe it’s a buyout or aggressive accumulation).

Dangers of Level 2 Quotes

Level 2 quotes aren’t perfect. Traders can intentionally hide their order sizes by splitting them up into smaller orders. They can also place an order to lead investors to believe that the stock’s price is going to trend a certain way, then pull the order before it’s filled and place a different one once others have been misled. If that sounds slimy, well… that’s the game. This is why I don’t day trade!

Wrapping it Up

If you’re thinking about getting into day trading, Level 2 quotes are an invaluable tool in your arsenal. They aren’t the be-all-end-all, but they are an important piece of your knowledge set. Learn them and take advantage of them!