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
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
(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
- 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
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
Buyers ----------- Sellers
JOHN $4900 | BOB $4950
LISA $4800 | FRANK $5000
Does this look like something you have
seen somewhere before? (hint: image
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.