Navigating the stock market is no easy task, which is why Easy Stock Loans is here to help! To make the stock market a little easier to understand, we are breaking down Level 2 Quotes on the stock market for you. Easy Stock Loans doesn’t offer investment or tax advice, we simply offer educational content about different companies and services related to the industry. For more details consider reading our article about Broker-Dealers and contact them for more advice.
What Is Level 2 in the Stock Market?
This initial question might be what brought you here in the first place. A Level 2 bid or quote involves Nasdaq stock order books. After an order is placed, it goes through market makers and other participants in the stock market. The order book, or Level 2, is list of rankings of the best bid and ask prices from all participants. This gives an insight to the price and lets you know who has interest in certain stock. This is particularly useful for day traders.
Level 2 also indicates where stock might be headed in the future, the types of traders buying and selling, and more. This is all essential information when focusing on the stock’s price action.
An Introduction to Level 2 Quotes
After defining the core function of Level 2, you’ll next want to take a deeper dive into the nuances and details of this finance function. Let’s take a closer look at the details behind Level 2 Quotes.
Who Is Interested?
In the marketplace, you will find three different types of interested parties. These include:
- Electronic Communication Networks (ECN) – computerized order placement systems that anyone can trade through.
- Market Makers (MM) – the people who ensure liquidity in the marketplace as they are required to buy or sell when no one else is buying or selling.
- Wholesalers (Order flow firms) – these entities execute orders for online brokers
A final player of importance is the market maker called the ax. This person controls price action for a given stock. You can determine the ax by watching the level 2 book for a bit. Look for the market maker who consistently controls the price action. That is the ax. Trading with the ax typically brings higher probability for success, which is why many day traders want to trade with this person.
How to Use Level 2 Quotes
Entering the stock market game means learning a whole new world of lingo and practices. Level 2 quotes exist to help you play that game better and increase the chance for success. Utilize these quotes to determine what is happening with certain stock. You can use level 2 quotes to:
- Determine the kind of buying occurring – whether that is retail or institutional. Do this by looking at market participants involved and note that retail traders do not use the same market makers as large institutions.
- Utilize the ECN to look for order size irregularities, which will tell you which institutional buyers are trying to go unnoticed. This is a good way to note buyouts and accumulations.
- Trade with the ax to increase the probability for a successful trade when the price is trending.
- Find trades that are between the ask and bid to see when a strong trend is ending. Large traders will do this when they are looking to get out of a stock before they lose too much.
This is just a quick overview of a complex topic – so be sure to reach out to Easy Stock Loans with further questions. Although Easy Stock Loans is not a broker, if you have any questions surrounding aspects of the stock market, we’re glad to discuss over a phone call. All in all, use Level 2 for a glimpse into a stock’s price action. Keep in mind the goal is to make money, so some market makers might hide their goals with ECNs, small order sizes, and timed trading. If you utilize Level 2 bid with other analysis options, you can safely make the decision of whether to sell or buy a stock.