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I am a small retail investor. I recently opened a new stock brokerage account. The stock brokerage firm is offering free Level 2 quotes for NYSE and NASDAQ. Judging by the general availability of this expensive Level 2 data, I would assume that other investors find Level 2 data useful enough that, in response to demand, the brokerage firm feels obliged to provide the data to retail investors for free.

What is the use of this Level 2 data for retail investors? Isn't Level 1 data sufficient for buying and selling? What advantages do I get from Level 2 data?

Chris W. Rea
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1 Answers1

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Let's say you want to buy shares of a thinly traded stock. (I, a retail investor, experience this often when I buy preferred share issues, despite many being from big name companies with a very liquid market for their common shares.)

A level 1 quote would show you the lowest ask price, and indicate how many shares are offered at that price. If that's more than you want to buy, fine. Your market order will likely fill at that price, provided nobody beats you to those shares.

But let's say only 100 shares are offered at the asking price, and you want to buy 1000 shares. How could you know the likely average price you would pay if you entered a market order just then? (I don’t intend to imply that a market order is the best idea in cases like this.) Your order will most likely not fill all at the ask price you see quoted, because that seller (or a bunch of sellers with the same asking price) hasn't enough shares.

The answer to that question is: level 2 quotes. The example market order could, say, get the first 100 shares filled at the lowest ask, a few hundred more at the next higher ask (what price is that?), and the rest at some even higher ask (and what price is that?). If you want to know all of these likely fill prices in advance of your order being entered and filled, level 2 quotes give you the information you need — and not just the "tip of the iceberg" you would only see with level 1. Level 2 quotes can inform what limit price to use if you want a good chance at 100% fill but without the risk of paying more than you want. Limit orders (and marketable limit orders, if you aren’t that patient) are a better way to trade low liquidity issues.

I explain more about this in my answer to this other question: Can someone explain a stock's “bid” vs. “ask” price relative to “current” price?

Chris W. Rea
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  • Preferred stocks often trade by appointment. Therefore, market orders should never be used with them or any other low liquidity stock. And the limit price should be no more than you're willing to pay (shift happens). I can't speak for Canada but in the US, preferred stocks have high prevalence of hidden orders. IOW, the ask size might be say 400 shares but a 1,000 shares order executes at the ask price. This has happened to me 100's of times, if not more in 20 years of owning and trading preferred stocks. – Bob Baerker Jun 04 '20 at 16:47
  • @BobBaerker I agree. I don’t use market orders for preferreds but I do use the level 2 quotes to inform my limit price. Here in Canada I have experienced better fills than I expected, so hidden orders may certainly be a thing here, too. Much of the volume in Canadian preferred shares is driven by a handful of large ETFs. – Chris W. Rea Jun 04 '20 at 17:36
  • I too have experienced better fills than expected, more than just from maker/taker rebates. Though I'm not complaining, I've never been able figure out why parts of a market order is filled at a penny or more better when I'm hitting the bid or ask size. It doesn't make sense, even if there's a hidden order in play. – Bob Baerker Jun 04 '20 at 18:06