Level II

In the previous section I talked about level I, which includes the best bid and ask (best prices) for a stock at a given time. This information is just the tip of the iceberg. Level II does not only show you the best bid and ask prices, it shows you all the prices (bids and asks) available for a stock. This is extremely important information because it helps a trader get a much better sense of where to place his or her order (based on available volume at different prices). It also provides a better indication of the short-term momentum of the stock.

Level II provides the number of shares at each available price for a stock, as well as through which institution or electronic system the shares are being ordered. Using a direct access broker and a program like RealTick, a trader can then choose which institution or electronic system to use to place the order (look at the order routing section below).

Example of LEVEL II:

On the left side are the open buy limit orders (BIDS) arranged from highest to lowest (best to worst). On the right side are the ASK prices, which are open sell limit order arranged from lowest to highest (best to worst). Level II software like RealTick color codes each price level to make it easier to read. The "Name" column gives a four letter symbol of the institution (e.g.: Lehman Brothers Inc. (LEHM) has an open order to buy 100 shares of YHOO at 32.74 or lower) or the electronic system (ex: ARCAX has an open sell order for 1500 shares at 32.79. The best bid and ask is given by the top color level. In the above example, the best bid is 32.79 and the best ask is 32.79. This is usually the only information (best bid and ask) that a person using an online broker like TD Waterhouse or a full-service broker like Merrill Lynch gets to see. Level II, on the other hand, gives the entire picture (or depth) of the market at any given time.