Demo Level II
Introduction To Level II
Level II can provide enormous insight into a stock's price action. It can tell you what type of traders are buying or selling a stock, where the stock is likely to head in the near term, and much more. Here we explain what level II is, how it works and how it can help you better understand open interest in a given stock.
What Is Level II?
Level II is essentially the order book for Nasdaq stocks. When orders are placed, they are placed through many different market makers and other market participants. Level II will show you a ranked list of the best bid and ask prices from each of these participants, giving you detailed insight into the price action. Knowing exactly who has an interest in a stock can be extremely useful, especially if you are day trading.
The Players
There are three different types of players in the marketplace:
· Market Makers (MM) - These are the players who provide liquidity in the marketplace. This means that they are required to buy when nobody else is buying and sell when nobody else is selling. They make the market.
- Electronic Communication Networks (ECN) - Electronic communication networks are computerized order placement systems. It is important to note that anyone can trade through ECNs, even large institutional traders.
- Wholesalers (Order flow firms) - Many online brokers sell their order flow to wholesalers; these order flow firms then execute orders on behalf of online brokers (usually retail traders).
Why Use Level II?
Level II quotes can tell you a lot about what is happening with a given stock:
- You can tell what kind of buying is taking place - retail or institutional - by looking at the type of market participants involved. Large institutions do not use the same market makers as retail traders.
- By looking for trades that take place in between the bid and ask, you can tell when a strong trend is about to come to an end. This is because these trades are often placed by large traders who take a small loss in order to make sure that they get out of the stock in time.
Level II can give you unique insight into a stock's price action.