For display traders, Level 2 commonly describes the subsequent quotes to the best bid and ask at either end of a spread.
However, there is more distinction to Level 2 and the order book when planning for market data requirements. Understanding the types of market data is first in delineating market data access needs.
What is Level 2 Market Data? Level 2 is a generalized term for market data that includes the scope of bid and ask prices for a given trading from news levels.
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Also called depth of book, Level 2 includes the price book and order book, listing all price levels of quotes submitted to an exchange and each individual quote. Certain exchanges offer summarized views of the price book, supplying the highest bids and lowest offers to simplify the book view and provide more affordable access to Level 2 data.
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For traders, the price book is an easily referenceable view of demand for a security and can underscore where points of support or resistance exist. This depth of book for a security is valuable for garnering the true demand and more accurately forecasting the behavior of price movement.
The order book is referenced by some professionals as Level 3 market data to distinguish the detailed view of quotes from the aggregated view of a price book. Regardless of terminology, understanding the nuances allows a broker-dealer or asset manager to better assess market data needs and communicate those to suppliers and connectivity providers.
Earnings reports: It is generally advisable to have a trading strategy in advance of an earnings report, because a stock can bounce around in a much wider range post-earnings, as compared to the swings in an index after a data release. In this case, the investor needs to weigh the merits of leaving the position unchanged over the earnings report or making changes prior to it. Factors that should play a part in this decision include: The current state of the overall market bullish or bearish ; Investor sentiment for the sector to which the stock belongs; Current level of short interest in the stock; Earnings expectations too high or comfortably low ; Valuations for the stock; Its recent and medium-term price performance; Earnings and outlook reported by the competition, etc. An alternative option could be to buy puts to hedge downside risk.
Multiple quotes from different banks confirm the Level 2 data is the order book and not a summarized or aggregated view of book depth. Alternatively, Level 2 is sometimes used on trading displays to differentiate the best bid and offer BBO at each exchange from the national best bid and offer NBBO.
Each of these views are commonly considered Level 1 data or top of book, as they lack the distinction of price levels for bids and asks. While the BBO of all 13 exchanges may emulate a price book, the BBO listed second may not be the second-best bid or offer in the price book.
Table 1. The types of market data quotes summarized by their level and book depth.
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Tiers of market data.