What does 'Level 2' mean

Level 2 is a subscription-based service that provides real-time access to the NASDAQ order book composed of price quotes from market makers registered in every NASDAQ-listed and OTC Bulletin Board securities. The Level 2 window shows the bid prices and sizes on the left side and ask prices and sizes on the right side.


Level 2 provides the user with depth of price information. This means all the available prices that market makers and electronic communication networks (ECN) are posting. While Level 1 only provides the inside or best bid and ask prices, Level 2 also displays the supply and demand of the price levels beyond or outside of the national best bid offer (NBBO) price. This gives the user a visual display of the price range and associated liquidity at each price level. With this information, a trader can determine entry and or exit points that assure the liquidity needed to complete the trade.

Nuances of Level 2

Users must be careful not to assume the price movement on Level 2 is an actual reflection of the trades that are recording. It is prudent to include the time and sales window to observe where trades are being made. Level 2 is just a display of the available price and liquidity. This is an important distinction because high-frequency trading programs frequently adjust Level 2 bid and ask prices violently to shake the trees and panic onlookers despite the lack of trades actually happening on time and sales. This is very common in momentum stocks.

Reserve and Hidden Orders

Many ECNs offer the ability for traders to post reserve orders and hidden orders. A reserve order is composed of a price and display size along with the actual size. This order only shows the specific display size on Level 2 as it hides the true total size of the order. For example, a trader may want to sell 10,000 shares of XYZ stock at $22.10, while the stock is trading at a bid of $22.05 with 500 shares and an ask of $22.10 with 100 shares displayed. If the trader actually posted the 10,000 shares to sell on the ask at $22.10, that would scare away the bidders at $22.05. The bidders assume the seller is desperate and will drop their bids lower to get a better price.

By posting a reserve order to sell 10,000 shares with only 100 shares displayed at $22.10, the trader facilitates the perception of limited supply on the ask. Anxious buyers rush in to buy the shares at $22.10, assuming the price will spike on demand. The trade is filled in 100-share increments up to the full 10,000 shares before it upticks and moves higher. Hidden orders function the same way but are invisible on Level 2, allowing for more discretion in determining prices. The best way to determine if reserve or hidden orders are filled is to check the time and sales for trades at the indicated prices.

  1. Bid Size

    The number of shares being offered for purchase at a specified ...
  2. Inside Quote

    The best bid and ask prices offered to buy and sell a security ...
  3. Best Bid

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  4. Bid Price

    The price a buyer is willing to pay for a security. This is one ...
  5. Market Maker

    A broker-dealer firm that accepts the risk of holding a certain ...
  6. Level 1

    A trading service that displays real-time bid/ask quotes and ...
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