What’s the Difference Between Level 1 and Level 2 Market Data?

This is a definition of Level 1 and Level 2 market data for our ‘Ultimate Guide on How to Use Financial Websites‘, which is part of our ‘How to Invest in Shares & the Stock Market‘ series.

The quality of the financial data an investor receives will be reflected in the quality of their decision making. For day traders or frequent participants in equity trading, the precision and knowledge of market pricing is far more important than for a ‘buy and hold’ investor. In the UK, access to market data is classified as either Level 1 or Level 2.

Note: Sub-level 1 data can be obtained from live share price websites and your broker. This simply shows you the buy and sell price that you can trade at.

What is Level 1 Market Data

Level 1 market data includes access to the following:

Bid Price & Size – This shows the highest price offered by a trader who has placed an order to purchase, together with the number of shares they wish to purchase at that price. If a day trader wishes to sell more shares than quoted at this price, they will have to accept a lower price to clear the excess shares.

Ask Price & Size – This shows the lowest price offered by a selling trader, together with the number of shares they are willing to sell at that price. If a day trader wishes to purchase more than this quoted size, they will have to offer more to settle the excess shares.
Last Price & Size – This simply shows the price and quantity of the most recent trade executed. Intra-day, this will be updating all the time, but at market close this will represent the closing price for the share.

 

Example of Level 1 Data for 3 Forex Pairs

How much does Level 1 market data cost?

Level 1 data can be purchased as an ‘add-on’ to your online brokerage account. In the UK the minimum cost of this service will determined by the fees that the broker has to pay the London Stock Exchange for the license to provide you the data, but this if fairly small, so many brokers will offer level 1 pricing for free.

What is Level 2 Market Data

Level 2 (II) market data is offered by data providers at a premium to Level 1. It offers extra information that is often not utilised by normal day traders, and is almost certainly irrelevant to long term investors.

Level 2 market data shows the trader a bigger picture of the ‘order book’. In Level 1 above, the trader was only able to see the best prices for buying and selling, and could not look any deeper into the details of other less competitive orders on the system. The distribution of uncompetitive orders is important to institutional investors who plan to buy or sell large blocks of shares.

 

Example of Level 2 quotes

If a pension fund wished to sell 50m shares in a medium sized company, they would look at their terminal. Using level 1 data, they may see that the highest bid price on the market is £20 for 50k shares. The pension manager will now know that they can sell their first 50k shares at £20, but will have to accept less in order to shift the rest of their holding. Therefore they would then trade at the next best bid price, and so on, and so on, receiving marginally less for their shares each time they exhaust an order in the market place.

It would therefore benefit the pension fund manager to be able to assess how quickly the competitiveness of the bid prices trail off, before they place a large block of shares for sale. This is called being able to see the ‘depth’ of the market. Market II data allows the participant to see the next 5-10 prices below/above the current best price, offering that insight. If the competitive orders are thin on the ground then they may decide to delay their sale or only sell a small batch. With a very full and competitive order book as a result of strong demand, the pension fund may be able to offload its shares without moving the share price down too much, achieving the best deal for their pension holders.

This demonstrates why level 2 data is quite pointless for your average day trader, who will be trading in such small quantities that their trade will rarely exhaust the bid price or offer price they could see on level 1.

Other than very large institutions, the only other viable market participant who could fully utilise such data would be a high-speed, automatic trading algorithm which pays extremely low commissions and could potentially take advantage of the relatively large price movements caused by ‘gaps’ in order books.

How much does Level 2 market data cost?

Level 2 market data will probably cost you between £10 and £30 per month with your brokerage account, and may come bundled with charting software as a ‘day trader pro’ style package. SharePrice.co.uk offers level 2 pricing on your smart phone for £20 p/m for its brokerage clients. However if you look hard enough, you may be able to access level 2 data for free depending on which investments you want quoting. Level2StockQuotes.com has a garish interface that may induce nausea, but it does provide level 2 data on US listed stocks for free. If you can look past the ad banners and search engine-friendly spammy text description, you may be able to glean the information you need without shelling out.

Simon OatesWhat’s the Difference Between Level 1 and Level 2 Market Data?