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Investor checks his mobile deviceSome of the more advanced trading platforms offer investors a service known as “Level 2 market data.” This usually comes as a premium feature, available for an additional price to investors who want it. If you’re a day trader or someone who wants to get in the weeds on the market, you probably will want access to Level 2 data. Here’s what it means, and how to know if you should pay for it. Consider working with a financial advisor about how to interpret market data.

What Is Level 2 Market Data?

Level 2 market data is a set of detailed information about asset prices, offers and trading volumes. It is particularly used by day traders and other high-volume investors who rely on it for technical and data-based trading. (Technical trading is when an investor makes their decisions based on market prices and information. This is as opposed to fundamentals trading, in which an investor makes their decisions about the products or companies underlying a given financial asset.)

Broadly speaking, market information is broken up into two categories of data: Level 1 and Level 2.

Level 1 data is what most people think of when they hear about asset prices and information. This includes data such as:

  • Bid/ask price – The highest price at which someone has recently bought the asset (the bid price), and the lowest price at which someone has recently sold the asset (the ask price). For particularly liquid assets, such as stocks sold on a major exchange, the difference between the bid and ask prices tends to be minimal.
  • Bid/ask volume – The number of units of this asset that traders are buying at the bid price (the bid volume), and the number of units of this asset that traders are selling at the ask price (the ask volume). For example, this might be the number of shares of stock or the number of contracts for an option.
  • Last price/last volume – The last price that someone traded this asset for (the last price) and the number of units of this asset that was involved in that transaction (the last volume).

This is the basic set of information that investors look for. For example, this is the information you will get if you pull up the listing for a stock traded on any major exchange.

Level 2 data goes into far more detail. This shows you what is known as the “order book” for an asset. The order book is the list of orders to buy and sell a given asset over time. Specifically, a Level 2 data set tells you:

  • High bid prices, participants and volume – A set of the highest current bid prices for this asset, defined as the highest prices at which investors have placed an order to buy it. These bids are ranked in order from highest to lowest (best to worst). Each entry shows you which market participant has placed this order, how many units of the asset they have ordered and the price at which they placed the order. Depending on the exchange, you may see between five and 15 entries.
  • Low ask prices, participants and volume – A set of the lowest current ask prices for this asset, defined as the lowest prices at which investors have placed an order to sell it. These bids are ranked in order from lowest to highest (best to worst). Each entry shows you which market participant has placed this order, how many units of the asset they have ordered, and the price at which they placed the order. Depending on the exchange, you may see between five – 15 entries.

Market participants are typically identified by a four-letter ID code.

For example, a Level 2 entry for shares of XYZ Corp. might look something like this:

  • Bid – JPMS – 101.6 – 100

This means that J.P. Morgan (identified by one of their trading codes as JPMS) has placed an order to buy shares of XYZ Corp. stock for $101.60. They have offered to buy 10,000 shares, as Level 2 data expresses volume in units of 100.

Using Level 2 Market Data

Investor analyzes Level 2 market dataLevel 2 market data provides insight into how the market is moving. The details in this information tell investors not just how much an asset is worth but also who is trading it and how much. Knowing that specific market participants have begun to buy or sell an asset can inform someone’s trading decisions, as can knowing how much of that asset has been placed on the market. The granularity of this information is particularly valuable.

Level 2 data is most specifically relied on by day traders who want to capture small or fast price movements. By studying the list of competing offers for an asset they can get an understanding of how that asset’s price is likely to trend in the immediate future. For example, if an asset’s bid transactions have begun trending toward the ask price, that’s a good sign that the price is about to go lower. Potential buyers have begun offering less and less money for it at the top end.

By contrast, increasingly high ask prices indicate that the asset may be gaining strength in the short term. Or an investor might decide that a given market participant is setting the price of a given asset. It’s common for a specific market maker, institution or other large investor to lead the price of a particular stock or other asset for a period of time. By studying the Level 2 data, a trader can decide if some specific investor is setting the current prices and make his or her trades accordingly.

Knowing who is trading, and what they’re trading, can be critical information. Not everyone needs it. Unless you’re trading on institutional movements or the fast-twitch world of day trading, this may not be very helpful. But for the investors who use it, Level 2 data can be critical.

The Bottom Line

Money manager studies Level 2 dataWhile Level 1 market data tells you the prices on the market, Level 2 tells you why those prices are moving. This kind of data includes the scope of bid and ask prices for a given security. By giving you the details about what prices investors are proposing and who has proposed those prices you can learn a lot about the market, and where it might move. This information helps investors gauge the availability or desire for a security at a certain price and a specific time.

Tips on Investing

  • If your investments aren’t providing returns equal to or greater than the inflation rate, you’re probably in trouble. Here’s a free and easy-to-use inflation calculator that will give you a read on historical inflation rates.
  • Before you start thinking about whether you have the right tools, consult a financial advisor to make sure you’re pursuing the right strategy. Finding one doesn’t have to be hard. With SmartAsset’s matching tool you can quickly find a financial professional near you to help you create that strategy for investment and long term goals. If you’re ready, get started now.

Photo credit: ©iStock.com/Thanumporn Thongkongkaew, ©iStock.com/ijeab, ©iStock.com/ijeab

Eric Reed Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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