The Difference Between Level I & Level II Stock Trades
Level I and Level II are two different types of trading screens used in stock trading. Some of the information the screens display are the same, including the stock’s last trading price, the current bid and ask price, the daily high and low and the trading volume. The ask price is the price for which you could immediately buy the stock. The bid price is the price for which you could immediately sell the stock.
The difference between Level I and Level II stock trading screens is the depth of information that the Level II screen provides.
Level II trading quotes include data regarding current order books and market depth, while Level I quotes focus exclusively on bid/ask prices.
Difference in Depth of Market Information
The depth of market shows you how many buyers and sellers are lined up to trade a stock. A Level I screen shows only the number of buyers and sellers with open orders at the current price. You have no information as to how many other buyers and sellers are out there.
A Level II screen shows the number of buyers and sellers at each price level. By adding up the number of buyers and sellers, you can determine whether there is more pressure to buy or sell the stock.
Difference in Stock Liquidity Information
Stock liquidity information tells you how fast buy and sell orders are executed and how fast new orders enter the marketplace. Stocks with a large number of traders have higher liquidity than stocks with only a few traders. Level I screens show only the immediate buy and sell orders, so you do not know if liquidity is increasing or decreasing. Level II screens reveal how many orders are lined up awaiting execution and let you determine how fast new orders are coming in.
Difference in Bid and Ask Spread Information
The difference between the bid and ask price is known as the spread. The bigger the spread, the less chance you have of getting your order filled at your desired price. Level I stock trade screens show the bid and ask spread for the current trade.
The spread can widen without your knowing it and increase the risk of your order being filled at an unattractive price. Level II screens show the bid and ask at each price level, so you can calculate the spread in advance of placing your trade.
Level 2 Trading Concerns
There are a few concerns to keep in mind if you decide to use a Level II trading screen. Although Level II screens show the full gamut of bid and ask price levels, they do not represent actual trades.
The Level II trading screen is constantly changing as orders are entered and canceled. Large orders can make it appear that there is heavy buying or selling interest. Traders who do use Level II stock trading screens might want to consult stock charts or technical indicators before placing a trade.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.