Description of Order Book, Level I and II Market Data

Learn the Difference Between Market Data Feeds

traders create market depth through buying and selling
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Among the tools that day traders use to make their trading decisions are various types of market data, commonly referred to as Level I and Level II market data.

This market data includes information about current prices and recently completed trades. Level II data provides more information than Level I. Traders decide which data feed they require for their trading, and then subscribe to that data feed through their broker.

Depending on the broker, Level I and Level II may have different costs associated with them. It's important to be aware of the differences in data feeds, so you aren't paying for something you don't need.

Key Takeaways

  • Market data feeds provide day traders with current stock prices and recent trades in order books that are sorted into Level I and Level II data.
  • Market data is provided by the exchange that's offering the market. Day traders can get its order books from their brokerages.
  • Level I market data includes basic information and is generally sufficient for most chart-based data systems.
  • Level II market data is more complex, because it shows all bids and offers, not just the highest.

Level 1 Market Data

Basic market data is known as Level I data. Level I market data provides all of the information needed to trade most chart-based trading systems. If trading using price action or indicator-based strategy, then Level I market data is all that is required. Level I data includes the following information:

Bid Price

The highest posted price where someone is willing to buy an asset.

Bid Size:

The number of shares, forex lots, or contracts that people are trying to buy at the bid price.

Ask Price

The lowest posted price where someone is willing to sell an asset. Also called the "offer price."

Ask Size

The number of shares, forex lots, or contracts being sold at the ask price.

Last Price

The price at which the last transaction occurred.

Last Size

The number of shares, forex lots, or contracts involved in the last transaction.

Scalpers, or traders who trade based on changes in how other traders are bidding and offering, use Level II data, which provides multiple levels of bids and offers.

Level II Market Data

Level II provides more information than Level I data. Mainly, it doesn't just show the highest bid and offer, but also bids and offers at other prices.

Highest Bid Prices

Shows the highest five to 15 prices where traders are willing to buy an asset and have placed an order to do so. It means you not only see the current bid, but also all the bids currently below it. In actively traded stocks, there will typically be bids every $0.01 below the current bid, and in actively traded futures, there will typically be a bid each tick below the current bid. If there is a gap between the current bid and next bid, that typically means that the stock or contract may have a larger bid/ask spread than stocks with bids or offers at every visible price level.

Bid Sizes

The number of shares, forex lots or contracts that people are trying to buy at each of the bid prices.

Lowest Ask Prices

The lowest five to 15 prices where traders are willing to sell an asset and have placed an order to do so. In actively traded stocks, there are offers every $0.01 above the current ask, and in actively traded futures, there are offers each tick above the current ask.

Ask Sizes

The number of shares, forex lots, or contracts that are available at each of the ask prices.

Level II market data provides the additional information needed to trade based on changes that occur in the bids and offers. Some traders like to look at how many shares are being bid versus how many are being offered, which may indicate which side is more eager or more powerful, and may predict the short-term direction of the market price.

This tactic is combined with watching the recent transactions. If most of the transactions are occurring at the bid price, it means that the price could go down in the short term, whereas if most of the transactions are occurring at the offer, the price could go up. These methods may also be combined with chart-based strategies.

Level II is also known as the "order book," because it shows all orders that have been placed and are waiting to be filled. An order is filled when someone else is willing to transact with someone else at the same price. Level II is also known as "market depth," because it shows the number of contracts available at each of the bid and ask prices.

Data Availability and Pricing

Market data comes from the exchange that offers the market. For example, the New York Stock Exchange (NYSE) provides Level I and II data for stocks listed on the NYSE. Day traders receive the market data via their day-trading brokerage. Level I and II are available for futures and stocks. Some forex brokers also offer Level II market data, although not all do.

Level II costs more than Level I for stocks and futures. Some brokers may provide all of the data feeds for free, but they typically charge higher commissions to compensate. Forex brokers that provide Level II data usually don't charge for it.

Frequently Asked Questions (FAQs)

How do you use the order book to trade?

The detailed data on trade orders can help inform your trading decisions. Exactly how the data will be used depends in part on your trading strategy, but in general, the order book gives you more detail about the strength and volume behind trade orders. If more orders are waiting on the buy-side than the sell-side, for example, then that's a bullish signal and it could give you more confidence in bullish trades.

How to brokerages profits from the bid-ask spread?

Brokerages and other market makers profit from the difference between the bid price and the ask price, otherwise known as the "bid-ask spread." Buyers pay the ask price and sellers receive the bid price, and market makers keep the difference. This may be only a penny or two or profit, but market makers do this thousands of times per day.