Market data plays an important role For day traders and investors. This explains why many market participants are usually willing to pay a subscription to access the data.
Not all data is the same. For a first glimpse, the basic data is enough.. If you want to do more in-depth analysis, you have to go deeper.
In this article, we will focus on Important part from the market Known as Level 2. We will explain how asset pricing works in stocks and how this level differs from level 1.
What is Level 2 data?
Level 2 data is important data provided by advanced brokers on a subscription basis. This data provides a real-time quote and query for an asset. The goal is to make sure that the trader can Find more data when executing trades.
In other words, the tool He provides merchants with Access to the order book So that they can make informed decisions. The chart below shows what this quote looks like.
Level 2 vs. Level 1
The common question asked The difference between Level 1 and Level 2 orders. Level 1 is the simplest pricing data offered by most brokers.
For example, when you use a broker like Robinhood and Schwab, the price you see is Level 1 data. Brokers are mandated by law to provide the most accurate data to their clients.
The main difference between Level 2 Level 1 is the latter He has more depthwhich is lacking in Level 1. It is also darker than Level 1.
Level 2 versus time and sales
Another concept you need to know is time and sales. Level 2 is often accompanied by: time and sales. The latter is known as tape reading. He simply It indicates volume, price, trend, date and time That every deal is executed.
These two items are very useful when you are day trading since they give you more information.
How does Level 2 bidding work?
To understand how Level 2 works, we first need to understand Payment concept for order flow (PFOF), which explains how US brokers operate.
American brokers like Robinhood, Schwab, and TD Ameritrade do not execute orders themselves. Rather, they are works with Market makersthat provide liquidity to them.
Examples of the largest market makers in the US are Citadel Securities, Virtu Finance, Susquehanna, ARCA, and others. Citadel and Virtu control about 22% of the entire market.
these Market makers take a small commission to complete an order. Despite this, they are able to make millions of dollars a day because they execute millions or even billions of trades.
When you enter a trade, The broker sends the command to his group from market makers and chooses the best price. By law, the order must be executed at the best price for the traders. These transactions happen within microseconds.
So, if you have a level 2 subscription, You will be able to see how to apply for the original. For very popular stocks like Google and Tesla, these transactions usually happen so quickly that it’s hard to see the queue. However, for companies with tight trading, it is possible to see the line.
How to access Level 2 data
There are two main ways to access this data when trading. First, you can pay a small fee to the broker to get this data. A broker like Webull charges about $2.99 per month to access this data. Depending on what type of trader you are, this small fee may make sense. However, if you are an occasional merchant, it is not worth paying the fee.
The other option is to obtain Level 2 data from your trading company. Many prop trading firms pay these fees to the companies and then provide the data to the traders for free. DTTW is one of those companies that provide this data to their traders.
Parts of a level 2 quote
A Level 2 quote consists of Several important parts that you can use in your daily trade. First, this data contains MPID class. Also known as Market IDthis category shows the market maker who will execute the order.
Some of the most popular MPIDs are NYB, MMXAnd amexand IEXX. In most cases, the spread between market makers will always be thin.
The other category in the Level 2 quote is the price. The price you see is what other traders are willing to pay for the asset.
Finally, there the size. In most cases, volume is usually quoted in the hundreds. So, when you see volume 78, it simply means that a trader has placed an order for 7800 to buy an asset.
the right side level 2 data is the side of the question. Ask is defined as the lowest price that the seller is willing to accept while the bid is the maximum price that the buyer is willing to pay.
Related “ What is spread trading in the markets?
Benefits of using Level 2 data
There are many benefits to using Level 2 data. Some of the most important benefits are:
Better understanding of market liquidity
Liquidity is defined as the ease of entering and exiting a trade. other than level 1 data, Level 2 can give you more information about liquidity in the market by demonstrating the strength of the order book.
This happens by showing the number of orders at each price level and helps you see support and resistance.
The ability to detect market manipulation
Market manipulation is an important thing that happens regularly. One common strategy is for large traders to place large orders and then cancel them.
When using Level 1 dataHe. She He is barely It is impossible to detect this market manipulation. Level 2 data can help you see this in a relatively easy way.
Improved order execution
Level 2 data can help Improve your order execution rate Because it gives you access to more detailed prices. Sometimes, some market makers can pay you when your order is executed.
Also, by seeing the price most traders put their trades in, you can Make informed decisions. In other sizes, you can get the best bid and ask prices.
Increase market awareness
It can give you access to Level 2 data More market awareness By providing you with more information about how market participants trade. This information is very difficult to obtain in Level 1 data.
In this article, we have looked at the important concept of Level 2 data and how it is used in the market. We have also looked at Some of the best strategies to use Data and how it differs from Level 1 data. Also, we evaluated the pros of using data.
Useful external sources
- Why and How Investors Use Level 2 Market Data – Smart assets