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 guide on how to research company share prices and company information, which is part of our free investing course series.

The quality of the financial data you can get hold of will impact the quality of your decision making.

For day traders who buy shares on a regular basis, the precision of market data is far more important than for a typical ‘buy and hold’ investor with a long time horizon.

In the UK, access to market data is classified as either Level 1 or Level 2.

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 last trade executed. During the day, this will be constantly in flux. But at the end of a trading day, this will represent the closing price for the share.

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 be determined by the fees that the broker has to pay the London Stock Exchange for the license to provide you with access. But as this is fairly small, many brokers will offer level 1 pricing to regular traders 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 marketplace.

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 that 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.

Interactive Investor, a UK stock broker, offers level 2 pricing for £20 p/m.

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 descriptions, you may be able to glean the information you need without shelling out.

Comments 2

  1. This was an incredible help.
    Literally took me from choosing dark in the dark to making an informed decision.

    I’ll be looking at the emini/micros futures contracts.
    I, however, am in the process of studying python automation which may lead to algorithmic trading. Would Level 1 still remain feasible If I’m trading a small number of contracts as opposed to what institutional investors are trading from an automated perspective?

    1. Post
      Author

      Hi Kevin,

      The answer is it depends. It depends on what data inputs your algorithm will use.

      If your trading robot is using other inputs, such as fundamental factors, news-based inputs or other information, then level 2 data simply won’t make a difference. In these cases, your algorithm would be instructing trades at the live market price regardless of information about the depth of the order book, making level 2 data a superfluous piece of information.

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