What is a Level II Quote?
A level II quote is a set of real-time trading information, including the best bid/ask prices from market makers, for a security that trades on the Nasdaq or over the counter (OTC) markets.
How Does a Level II Quote Work?
A level II quote for Company XYZ stock would include the real-time bid price, ask price, quote size, price of the last trade, size of the last trade, high price for the day, and low price for the day. This is the same data given in level I quote but level II quotes also provide a ranked list of the best bid and ask prices from participating market makers in real time. The information comes from the securities dealers that make up the market.
Professional traders usually get level II quotes from a small-order execution system, electronic communication network or other professional trading system.
Why Does a Level II Quote Matter?
Level II quotes are powerful because they provide information about the latest trades as well as information about who is willing to make trades at certain prices. The quotes essentially give viewers access to the 'order book' showing all the offers for a security -- that is, who has an interest in a security and at what price, as well as the interested party's patterns. This, in turn, can tell traders whether a stock's price will increase or decrease in the short-term, and it can help traders understand the trading strategies of other firms.
For example, if a day trader with level II quotes discovers that a particular institution has interest in a stock, it may be an indication that a large trade is pending and it could be an opportunity for the day trader to buy some of the shares in anticipation of the large institutional trade driving the price up. However, traders can also manipulate level II quotes by placing only small orders so as not to tip off other traders about an intention to purchase or sell a large amount of shares. Therefore, level II quotes should not be relied upon without other supporting analysis.
