You have probably heard of Level 2 quotes and are wondering what they are, how to use them and how to get them. Good news! All your questions will now be answered.

When you get a normal stock quote, you see the price of the last trade, the volume and the change from the previous price, this can be called a Level 1 quote.

Level 2 (L2, LII) is an essential tool that any serious trader requires. L2 lets you look behind the scenes at what is going on beyond the current bid and ask of a stock and gives you a clear snapshot of how much demand and supply there is at that precise moment in time.

The most basic and fundamental rule of the markets is that there are only two things which make any stock move, supply and demand.

- If there is a lot of demand for a stock, the price will go up.
- If there is a lot of supply, a stock will go down.
- If demand matches supply, the stock will go sideways.

Congratulations, you now know the secret of the stock markets!

Understanding Level II



To begin understanding level II you must understand how an open market works.

Let us use an example of your neighbor Frank who is selling his car for $5000.

You friend Lisa wants to buy his car, but low-balls the offer at $4800. Your other friend John also wants to buy the car, and since he knows that Lisa offered $4800, he has to offer a better price to get it, so he comes in at $4900.

As it turns out, your other neighbor Bob has the exact same car for sale, he heard that Frank is selling his for $5000, but Bob wants to get rid of his car fast, so he prices it at $4950.

What we have here is a market of two buyers and two sellers. If this car sale had a level II quote, it would look like this:

Buyers ----------- Sellers
JOHN $4900 | BOB $4950
LISA $4800 | FRANK $5000

Does this look like something you have seen somewhere before?  (hint: image above)

You can clearly see that John is the highest bidder and Bob is the lowest seller. Odds are if John wanted to grab the car now, he would just meet Bobs price of $4950 (aka hitting the ask), or if Bob wanted to get rid of his car quickly, he could just sell at the highest bid (hitting the bid)

Now imagine this scenario playing out hundreds of times every minute with hundreds of buyers and sellers and now you understand level II.

Level II is essentially an order book for Nasdaq stocks, OTCBB and Pinks also have level II, but you will not find NYSE showing level II.

Instead of John, Bob, Lisa and Frank showing up as buyers and sellers, we have what are called Market Makers or MM’s. When you place an order with your broker, he will route your order through an MM. The MM acts on your brokers behalf, placing the bid or matching the trade for you, in effect, you control the MM. These MM’s your online broker is using are most likely not people sitting at a desk punching away at their keyboards, but rather, an ECN (electronic communications networks), examples of ECNs are NITE, ISLD and ARCA.