What is Level 2 Trading: A Simple Guide

Level 2 trading, also known as market depth or order book, provides more information about current market activity compared to Level 1 data.

In the context of the stock market, Level 1 data includes basic information such as the current bid and ask prices, last traded price, and trading volume. Level 2 data, on the other hand, provides a more detailed view of the market by displaying the full order book.

What is Level 2 Trading?

Imagine a crowded marketplace where buyers and sellers are constantly negotiating prices. Level 2 trading is like having a special pass that allows you to see not just the final agreed-upon prices but also the individual orders that are fueling these transactions.

In simpler terms, Level 2 trading unveils the hidden details of the market, revealing the prices, quantities, and intentions of buyers and sellers. This detailed information goes beyond the basic buy and sell orders displayed on Level 1, offering a more comprehensive view of market sentiment.

What is Order Book

An order book is a list of buy and sell orders for a security, organized by price level. It is a dynamic record of the current market sentiment, reflecting the willingness of buyers and sellers to transact at specific prices. The order book plays a crucial role in price formation and market liquidity.

Key Components of an Order Book:

1. Buy Orders: These orders represent the demand for a security, indicating the prices at which buyers are willing to purchase.
2. Sell Orders: These orders represent the supply of a security, indicating the prices at which sellers are willing to sell.
3. Price Levels: The order book is organized by price levels, starting from the highest bid price to the lowest ask price.
4. Quantity: Each order in the book is associated with a quantity, indicating the number of shares or units that the buyer or seller is willing to transact at that price level.

key components of Level 2 trading:

1. Order Book:
   • Bid Side: Displays a list of all the current buy orders and their corresponding prices.
   • Ask Side: Displays a list of all the current sell orders and their corresponding prices.
2. Market Depth:
   • Shows the number of shares or contracts available at different price levels on both the bid and ask sides.
   • This information helps traders understand the supply and demand dynamics in the market.
3. Order Size:
   • Reveals the quantity of shares or contracts being bid or offered at each price level.
4. Time and Sales Data:
   • Provides information about the time and price of recent trades, allowing traders to see the direction and size of recent transactions.

Level 2 data is crucial for several reasons:

1. Better Market Insight:
   • Traders can see the entire order book, allowing them to gauge market sentiment and predict potential price movements more accurately.
2. Liquidity Assessment:
   • It helps traders assess the depth of the market and identify areas of support and resistance.
3. Real-time Information:
   • Level 2 data provides real-time information about order flow, helping traders make more informed decisions.
4. Algorithmic Trading:
   • High-frequency traders and algorithms use Level 2 data to make split-second trading decisions based on the most up-to-date market information.
5. Scalping Opportunities:
   • Traders who engage in scalping (short-term trading) often rely on Level 2 data to identify quick opportunities for profit.

Benefits of using level 2 trading:

1. Improved order execution: Level 2 trading can help traders get better fills on their orders by allowing them to see the orders that are already in the market.
2. Reduced risk of getting picked off: Level 2 trading can help traders avoid getting picked off when they are placing large orders.
3. Improved market awareness: Level 2 trading can help traders get a better understanding of the supply and demand for a particular security.
4. Identification of trading opportunities: Level 2 trading can help traders to identify potential trading opportunities.

Level	Description
1	Displays the finest bid and ask prices along with their corresponding quantities on both sides of the market.
2	Provides a comprehensive view of market depth, encompassing approximately 5-10 of the best bid and offer prices, along with quantity information and details about market makers.
3	Offers an even more detailed market depth, revealing typically 10-20 of the best bid and offer prices, along with associated quantities and insights into market makers.

Pros of Level 2 Trading

1. Deeper Market Insight: Level 2 trading provides a more detailed view of market activity, allowing traders to see the entire order book. This depth of information can enhance market analysis and decision-making.
2. Real-Time Data: Traders receive real-time information about the order book, enabling them to react quickly to changing market conditions and make timely trading decisions.
3. Liquidity Assessment: Traders can assess the liquidity of a security by observing the number of shares or contracts available at different price levels. This information helps identify potential support and resistance levels.
4. Improved Order Execution: With visibility into the order book, traders may be able to get better fills on their orders by placing them strategically in the market.
5. Identifying Trading Opportunities: Level 2 data can be used to identify potential trading opportunities, such as spotting clusters of buy or sell orders that may indicate a trend.

Cons of Trading Level2

1. Complexity: Level 2 data can be complex and overwhelming for inexperienced traders. Understanding and interpreting the information may require a certain level of expertise.
2. Information Overload: The detailed data provided by Level 2 can lead to information overload. Traders need to filter out relevant information and avoid being overwhelmed by the sheer volume of data.
3. Cost: Access to Level 2 data may come with additional costs, as some trading platforms charge fees for this advanced market information.
4. Limited Scope: While Level 2 provides a detailed view of the order book, it may not capture all market participants’ activities, particularly those using dark pools or other alternative trading venues.
5. Potential for Manipulation: In some cases, traders may manipulate the order book to create false signals, making it challenging for others to accurately interpret market sentiment.

Level 2 Trading Best Platform

1. SharePad: SharePad is a comprehensive trading platform that offers a wide range of features, including Level 2 trading, charting, and technical analysis tools. It is a good choice for traders who want a powerful and versatile platform.
2. ShareScope: ShareScope is a professional-grade trading platform that offers advanced features, such as multi-market trading and real-time news. It is a good choice for traders who want the most sophisticated tools available.
3. IG L2 Dealer: IG L2 Dealer is a low-cost trading platform that offers Level 2 trading and live prices. It is a good choice for traders who want a basic Level 2 platform at a reasonable price.
4. ADVFN: ADVFN is a UK-based trading platform that offers Level 2 trading, charting, and news. It is a good choice for UK traders who want a platform that is tailored to the UK market.