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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. (For further reading, see our Electronic Trading tutorial.)
This is what a level II quote looks like:
This tell us that UBS Securities is buying 5,000 shares of stock at a price of 102.5. Note that the number of shares is in hundreds (x100). Now let's take a look at the market participants.
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).
Each market participant is recognized by the four-letter ID that appears on level II quotes. Here are some of the most popular ones:
| UBSW |
UBS Securities |
LEHM |
Lehman Brothers |
| DBAB |
Deutsche Bank Alex. Brown |
MLCO |
Merrill Lynch |
| JPHQ |
JPMorgan |
MSCO |
Morgan Stanley |
| GSCO |
Goldman Sachs |
BEST |
Bear Stearns |
| FBCO |
Credit Suisse First Boston |
SBSH |
Salomon Smith Barney |
| NMRA |
Nomura Securities |
SGAS |
SG Americas Securities |
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