Introduction to Level II Quotes

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Introduction to Level II Quotes

Level II may reveal a wealth of information about a stock’s price movement. It can tell you who is buying and selling a stock, where the price is expected to go in the short term, and much more. We’ll describe what Level II is, how it works, and how it might help you better understand open interest in a certain stock in the sections below.

Key Takeaways

  • Level II displays the Nasdaq order book, including the best bid and ask prices from different market makers and other market players.
  • Level II tells you who is making the deal, whether they are buying or selling, the quantity of the order, and the price given.
  • Market makers, who buy and sell at all times to provide liquidity; ECNs, or computerized order placement systems; and wholesalers, who deal with online brokers, are the three actors in the marketplace.

What Is Level II?

Level II is basically the Nasdaq order book. Orders are placed via a number of different market makers and other market participants.

Level II will provide a ranked list of the best bid and ask prices from each of these players, providing you with in-depth information about the pricing activity. Knowing who owns a stock may be highly helpful, particularly if you are day trading.

Here is what a level II quote looks like:

Image by Sabrina Jiang © Investopedia2020

This indicates that UBS Securities is purchasing 5,000 shares of stock at a cost of 102.5. Notably, there are hundreds of shares available (x100).Let us now look at the market players.

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Introduction To Level II Quotes

The Players

Market makers, electronic communication networks, and wholesalers are the three sorts of market participants.

Market Makers (MM)

These are the market participants that supply liquidity. This implies they must purchase when no one else is buying and sell when no one else is selling. They control the market.

Electronic Communication Networks (ECN)

Computerized order placement systems are electronic communication networks. It is vital to highlight that anybody, even huge institutional traders, may trade using ECNs.

Wholesalers (Order Flow Firms)

The order flow of many internet brokers is sold to wholesalers. Following that, these order flow providers execute orders on behalf of internet brokers (usually retail traders).

The four-letter ID that appears on level II quotations identifies each market participant. Some of the most well-known ones are listed here.

GTSZGTS Securities, LLC
CDRGCitadel Securities, LLC
UBSSUBS Securities, LLC
DBABDeutsche Bank Securities, Inc.
JPMSJ.P. Morgan Securities LLC
GSCOGoldman Sachs and Company
FBCOCredit Suisse Securities (USA) LLC
NMRANomura Securities International, Inc.

The Ax

The ax is the most crucial market maker to watch for. This is the person or entity that controls the price action of a particular stock. Observing the level II behavior for a few days will reveal whose market maker this is. The ax is the market maker who continuously dominates price action. Many day traders make it a point to trade with the ax since it usually results in a better chance of success.

Why Use Level II?

Level II quotations may tell you a lot about what is going on with a particular stock:

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  • The sort of market players participating might indicate whether the purchasing is retail or institutional. Retail traders do not employ the same market makers as large institutions.
  • When looking for abnormalities in ECN order sizes, you may identify when institutional players are attempting to keep their purchases secret (which can mean a buyout or accumulation is taking place).We’ll look at methods to identify similar abnormalities further down.
  • Trading using the ax while the price is trending increases your chances of a successful transaction significantly. Remember that the ax provides liquidity, but its traders, like everyone else, are looking to make a profit.
  • You may identify when a strong trend is going to terminate by watching for transactions that occur between the bid and ask. This is because these transactions are often executed by major traders who suffer a minor loss in order to exit the stock on time.

While Level II might be useful for traders seeking for information about a single stock, they should be aware that some market makers mask their transactions and movements in order to confuse other players.

Tricks and Deception

While observing Level II might reveal a lot about what is going on, there is also a lot of misdirection. Here are a handful of the most typical market makers’ tactics.

Hiding Order Size

Market makers may conceal their order quantities by placing minor orders that are updated as they get a fill. They use this to unload or pick up a huge order without alerting or frightening away other dealers. After instance, no one is going to try to break through a 500,000 share resistance, but if a 10,000 share resistance persists, traders may believe it is a beatable obstacle.

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Order Sizes and Timing

Market makers may also attempt to trick other traders with their order amounts and timing on occasion. JPMS, for example, may make a huge offer to entice short sellers, only to withdraw the order and post a large bid. As a result of the huge offer, the new shorts will be forced to cover.

Trading Through ECNs

Market makers may also conceal their operations by using ECNs. Because ECNs may be utilized by anybody, determining whether big ECN orders are retail or institutional can be challenging.

The Bottom Line

Level II may provide you with unique insight into a stock’s price behavior, but market makers can also conceal their genuine intentions. As a result, the ordinary trader cannot depend only on level II. Rather, they should combine it with other types of research when deciding whether to purchase or sell a company.

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