# Understanding Level 2 Quotes: Nasdaq Definition, Function, and Examples

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> **Definition**
>
> Level 2 is a subscription-based service that provides real-time access to the NASDAQ order book, showing bid and ask prices and order sizes from market makers and electronic communication networks.

## What Is Level 2?

First introduced in 1983 as the Nasdaq Quotation Dissemination Service (NQDS), Level 2 is a subscription-based service that provides real-time access to the NASDAQ [order book](https://www.investopedia.com/terms/o/order-book.asp). Introduced as Nasdaq Quotation Dissemination Service in 1983, it is intended to display market depth and momentum to [traders](https://www.investopedia.com/terms/s/stock-trader.asp) and [investors](https://www.investopedia.com/terms/i/investor.asp).

The service provides price quotes from [market makers](https://www.investopedia.com/terms/m/marketmaker.asp) registered in every [NASDAQ](https://www.investopedia.com/terms/n/nasdaq.asp)\-listed and [OTC](https://www.investopedia.com/terms/o/otc.asp) Bulletin Board security. The Level 2 window shows the bid prices and sizes on the left side and ask prices and sizes on the right side. Level 1 and Level 2 differ in providing deeper price and liquidity data.

Having real-time access to the order book can be highly beneficial for traders and investors.

### Key Takeaways

*   Level 2 provides real-time access to the order book for NASDAQ-listed securities, offering insights into market depth and momentum.
*   The Level 2 service shows bid and ask prices and sizes from market makers, helping traders visualize supply and demand.
*   Traders prefer Level 2 for its detailed price level and liquidity display beyond the national best bid offer (NBBO).
*   High-frequency trading can cause rapid changes in Level 2 prices, which may not reflect actual trade executions.
*   Access to Level 2 quotes allows traders to identify trends, liquidity volumes, and order sizes, aiding in strategic trading decisions.

## Understanding Level 2 Trading: Fundamentals and Features

Level 2 shows depth of price information, listing all prices posted by market makers and [electronic communication networks (ECNs)](https://www.investopedia.com/terms/e/ecn.asp).

[Level 1](https://www.investopedia.com/terms/l/level1.asp) offers enough information to satisfy the needs of most investors, providing the inside or best bid and ask prices. Active traders prefer Level 2 because it shows [supply and demand](https://www.investopedia.com/articles/economics/11/intro-supply-demand.asp) at price levels beyond the [national best bid offer](https://www.investopedia.com/terms/n/nbbo.asp) (NBBO). This gives the user a visual display of the price range and associated liquidity at each [price level](https://www.investopedia.com/terms/p/price_level.asp). This information helps traders find entry and [exit points](https://www.investopedia.com/terms/e/exit-point.asp) to ensure the necessary [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) for trades.

This distinction is key because [high-frequency trading](https://www.investopedia.com/terms/h/high-frequency-trading.asp) often shifts bid and ask prices sharply to unsettle observers, even without actual trades. This practice is common in momentum stocks.

## Insights on Reserve and Hidden Orders

Many ECNs, which are the automated systems that match buy and sell orders for securities, offer the ability for traders to post reserve orders and hidden orders. ECNs generally display the best available bid and ask quotes from multiple market participants, and they also automatically match and execute orders.

ECNs offer reserve orders that include a price, display size, and actual size. This order shows only the display size on Level 2, hiding the true size.

Hidden orders allow investors to hide large orders on ECNs, remaining invisible on Level 2. This approach provides more discretion in price determination. The best way for users to determine the status of reserve or hidden orders is to check the time and sales for trades at the indicated prices.

## Advantages of Utilizing Level 2 Quotes in Trading

The main benefit of using Level 2 quotes is getting access to a wealth of information related to the market. This information can be used in various ways for profit-making. For example, you can [ascertain liquidity volumes and order sizes](https://www.investopedia.com/articles/active-trading/021915/how-important-tape-reading-modern-markets.asp) for a stock traded on Nasdaq. You can also identify trends using information about bid and ask orders.

*   Important information related to market makers and institutional investors is also available in Level 2 quotes. Traders can use this information to their advantage. For example, they can gauge an institutional investor's interest in a large stock from their order sizes and place identical orders. A similar strategy can be used with reserve orders, which are large orders broken into smaller-sized lots. Once they have identified hidden orders from L2 quotes, traders can place similar orders because institutional investor action will help support and resistance levels for that stock's price.

## Analyzing a Level 2 Quote: A Detailed Example

There are six important columns in a Level 2 quote for a given stock. The first one is _MMID_. This column identifies the four-letter identification for market makers. The second column is _Bid_ or the price that the market maker is willing to pay for that stock. The third column is _Size._ This column is the number of orders placed by the market maker at that size.

The remaining three columns on the right hand side are similar. The sole exception is _Ask_, which is the price that the market maker is willing to sell that stock price. Traders can use the difference between the bid and ask prices to determine pricing pressure and implement trading strategies.

## The Bottom Line

Level 2 market data offer real-time access to the NASDAQ order book for market depth and momentum. A major benefit is that it gives traders and investors a panoramic view of market action, which aids in executing informed trading strategies. Potential risks associated with interpreting Level 2 data include the misleading nature of visible orders influenced by high-frequency trading.

Level 2 provides more detailed insights into price levels and liquidity than Level 1, which are crucial for active traders, but it's important that traders understand reserve and hidden orders in Level 2 to discern actual liquidity versus displayed liquidity. Level 2 quotes can be a valuable tool for traders looking to gain deeper insights into market activity, but they require careful interpretation and a solid understanding of market mechanics.

> **Article Sources**
>
> 1.  NASDAQ. "[Nasdaq Level 2 (NQDS)](http://www.nasdaqtrader.com/Trader.aspx?id=nqds)." Accessed Nov. 9, 2020.
>     
> 2.  U.S. Securities and Exchange Commission. "[Nasdaq Market Center Description](https://www.sec.gov/rules/other/nasdaqllcf1a4_5/e_sysdesc.pdf)," Page 3. Accessed Nov. 9, 2020.