An underappreciated subset of technical analysis, known as Level II market data, can be very useful for traders. Level II market data shows more broad market orders beyond basic supply, demand, and market prices. That is, it expands the information found in various Level I.
Level II data is also known as “market depth” by showing the number of shares, contracts, or lots available at each individual price. In addition, it is commonly referred to as the order book, since it shows the various orders that have been placed and are waiting to be filled. An order is filled when buyers and sellers in the market agree to transact at a certain price.
Stage I Market Data
Level I data includes the following: Bid price : The highest price a market participant is willing to buy an asset or security at. Bid size : The quantity of assets that market participants want to buy at the bid price. This includes the number of shares (eg, stocks), contracts (eg, futures), or lots (eg, forex).
Sometimes this number is divided by 100 (and sometimes a different number) just to shorten the number of digits that need to be used. Ask price (also known as bid price): The lowest price a market participant is willing to sell an asset or security at. Ask size : The quantity of an asset that a market participant wants to sell at the asking price. This includes the number of shares, contracts, or lots. Market price (sometimes last price): The price at which the last trade was settled. Market size (sometimes the last size):
The number of shares, contracts, or lots involved in the previous transaction. Traditional technical analysis, which involves trading based on price action or indicators involving the transformation of price and/or volume, relies on Level I data. Standard Level I data can usually be viewed within your broker.
For example, here is Level I data on Google stock (GOOG) This shows bid, ask, current market price, current size (bid and ask size of both 200 stocks, as labeled by “2 × 2”)
Market Data II (Market Depth / Order Book)
Level II data includes multiple bids and ask/offer prices. This shows that other market players are bidding and offering different price ranges. In addition to Level I data, Level II includes what other market makers set their buy and sell levels at.
What is a market maker?
They are securities or asset dealers who provide liquidity to the market by being ready to buy and sell at a certain price at all times. For most traders, Level I data will be available to you through your broker. And often, but not always, for free. For those who rely on deeper data, such as what order size is located at what price, they need to have Level II data.
This is often provided by brokers for a fee. It may be free or may not be available at some brokerages at all. Level II data is generally more expensive than Level I data on stock and futures trading platforms. It is regularly released on many forex brokers. For an example of the difference between Level I and Level II data, let’s say you trade a stock with a market price of $25.00; the bid is $24.98 and the ask is $25.02. This is standard level I data.
Level II will enter the offer list and ask for prices up and down the ladder. For example, you might see bid prices at $24.95 and $24.92 with more sizes than you see at regular Level bids and ask prices at $25.05 and $25.08. Generally, there are five to twenty different bid and ask prices, all from different market makers and market participants.
Level II data includes offers from Level I data plus all other offer prices below this figure. In the most liquid (the most heavily traded) markets, you may see bid prices for each individual price increase – for example, for every $0.01 in a large cap stock. If an asset or security has a large bid/offer – that is, the difference between the bid and ask is 0.1% or more of the warrant price – they may also have a large enough gap in the bid and ask spread in the market depth data.
Bid size : The quantity of assets that market participants are willing to buy at various bid prices. Multiple response pricing : This includes asking from Level I data and asking for prices above this figure. As is the case with bid data, asking prices will generally be quite tight together in the most liquid markets. In a less traded, more illiquid market, offers will be spaced further apart.
Ask size : The quantity of an asset that market participants are willing to buy at various ask prices.
Example of Stage II Market Data
The top of the chart shows the bid (160.950) and ask (160.960) prices, or the standard Level I data. Level II data includes bids all the way down the middle of the left column and asks all the way down in the middle of the right column.
To the left of the bid price (the column starting with 160,950) is the size, or number of shares, offered at that level. The next column is the cumulative size. That represents the amount of shares that will be offered to support the stock price before falling to that price. The same thing is done on the asking side (right side). The very far left and right columns represent different market makers. Many traders like to see the cumulative number of shares offered at each level. If there is an imbalance, that may indicate which side the market is leaning towards with respect to a particular security or asset.
Traders can also look at the size offered on the bid and ask to get a general understanding of where the market is likely to head.
In this particular example, there are more shares being offered on the ask side (left side), indicating that the buyers are, in essence, stronger than the sellers. Therefore, this may inform traders of bullish tendencies as long as lower Level II data / orders into the decision making process. In terms of further examples, but relying on Level I data only, below we look at the Ford bond (F) where the size is $80K on the bid and $3K on the ask.
This means that the market is clearly bullish, or expecting a certain security to go up. We look at the same on the following Petrobras bond (PETBRA) where the size is $250K on bid and $155K on ask. Bidding exceeding demand is a bull market.
On Omega Healthcare Investors (OHI) stock you can see about twice as much size on the ask than the offer. This indicates a weaker slant. Some traders will also notice any asymmetry regarding where the latest transactions are taking place. If more transactions are getting closer to the offer (lower price), that may indicate that the price may be trending lower.
If more transactions fill closer to demand (higher prices), that may indicate that prices may tend to rise. None of this, of course, is fool proof. Orders can come in at any time to influence the direction of the market.
The conclusion
Level II market data, also known as “market depth” and the order book, looks at bid and ask prices and sizes outside the bid and ask prices that are closest to the market price in Level I data. Day traders can receive Level I and Level I market data II through their brokerage. Level II data should be available for stock and futures trading.
However, there is an additional charge for this. Some provide Tier I and Tier II data for free, but may compensate by charging higher commissions per trade. Many forex brokers offer Level II market data, but some do not.
Many will provide you with Tier I data and logging platforms. Level II data is usually not used in isolation as a trading strategy. Day traders will generally use it in conjunction with technical analysis strategies or in conjunction with fundamental analysis. But it can be an additional form of analysis to help better inform trading decision making.