Level II Stock Quotes

There are different levels of stock quoting systems. The level II stock quotes are composed of a list of orders from various NASDAQ participants. This order book can be ordered by order placer, best bid, best ask or volume of stocks requested.

While level 2 stock quotes can be a handy tool for the average stock trader or investor to get a better insight into the current state of a stock, it can also be a huge distraction when trying to figure out the logic of the institutional investors instead of worrying about how the stock fits into your portfolio.

Level II Quote Basics

Each allowed participant into the NASDAQ exchange system is assigned a 4 letter ID. For example Merrill Lynch is MLCO. Some traders believe that by learning the different players you can have a better understanding of the future of the stock price because individual market makers know different securities better. You can track the size and success of different market makers to figure out those you want to use as buy or sell signals.

The three major player types are:

  • Market Makers
  • Electronic Communication Networks
  • Wholesalers

If you’re interested in what the “pure” market is interested in you’ll want to follow wholesalers, as they tend to do the heavy lifting for online brokers. If you’re interested in institutional investors you’ll want to keep an eye on the ECNs and Market Makers.

The other information on the level II quote that provides significant value is the highest bid and ask prices combined with the size of the order. This is great for getting a loose feel of increased interest in either direction. The problem comes when there are more traders waiting to pounce in a single direction than orders showing on the Level II System. This is how surprise reversals can happen.

A tidbit of caution: remember that the level II quotes only show the highest bid or the lowest ask. It’s easy to assume that the whole order is for those prices. Sometimes market makers will throw teasers into their order to see what kind of interest there is without having to pay for the whole order. The safest route is to always put a limit order with your purchases so you don’t overpay thinking there is plenty of interest in selling the stock.

Blinded by Level II Stock Quotes

Unless you are day trading, or involved in penny stock trading, the information from a level 2 stock quote may be too much detail for your game plan. You may second guess your decision because you see you are going against UBS or another big hitter, but the reason for their decisions may have no influence on the reasons you are buying the stock. You are much smaller than they are. Sometimes institutions buy and sell stock just so the right names show up on their major holding for their prospectus. Trust me; no one is concerned with your prospectus.

If you enjoy looking at the level II stock quotes then you should formally build them into your investing plan. Some good choices are to use them for entry and exits and not for decision making. Adding an extra 1% return because of a lower entry or increased sale can help reduce the risk of bad decisions. It may save you a few trading expenses which really add up over time.

The level II stock quote is primarily a day trader tool. It is also useful if you trade penny stocks, because it is used to show more detail on the buying and selling interest in the moment. It really has very little bearing on anyone who wishes to buy and hold for the long term. The only other reason to have interest in level II stock quotes is if you are moving very large orders of stock at one time so you don’t push your own stock price. This is another reason why it is useful when buying penny stocks or selling them.