Articate

Level 2 is an ideal tool to use when share trading because it shows you the order book of the various different shares that are listed on the stock exchange. It shows you the number of orders and the quantity of each order on both the buy and sell side of the order book. It also shows you the depth of orders on both sides, so you can really get a good idea of the buying and selling pressure of the various different shares that you may be watching.

This Level 2 data will help you determine where a share is likely to move in the immediate future, ie in the next few minutes and hours. In general if there are more orders (and bigger orders) on the buy side, ie the left hand side, of the order book, then you can expect the stock to move higher in the near future as there are more people wanting to buy the stock than sell it at the present time.

In essence it is all about demand and supply. If a share is trading at 100p, for instance, and there is currently orders totalling 1,000,000 on the buy side of the order book (waiting to buy shares at 100p) and just 25,000 on the opposite side waiting to sell at 101p, then you would expect these last few shares to get snapped up fairly quickly, and for the price to move to 101p with a spread of 101-102p.

It doesn’t always work out this way of course because large orders can come on to the order book at any time and for whatever reason. So in this case you could see some large sell orders come on to the order book at 101p, and people may then start selling large amounts of shares at 100p in order to get their order matched.

Indeed that’s the major problem you have with Level 2 share trading data. Level 2 is great for providing you with information about various shares, but it is only a snapshot of the market at any given time.

There are a lot of games being played by the various market participants and sometimes they will place large orders on one side of the market, giving other people the impression that there is strong demand. However the reality is that they have no intention of seeing this order get matched because it is just far enough away from the current price for it not to get matched. All they want to do is try and influence the market in some way in order to try and profit from the resulting price movement.

You will also see a lot of games being played when you use Level 2 to monitor smaller shares. This is because these are heavily influenced by market makers, and they are perfectly placed to manipulate the order books by constantly moving their orders.

For example if one of these market makers wanted to shift some of their shares in a certain company they may suddenly drop the offer price on the sell side of the order book so that their order is at the top of the order book and below the price of all the other markets makers so their order is likely to get matched. Similarly they may suddenly push the price up on the buy side of the order book if they wanted to accumulate stock in a certain company because it would encourage current holders to take profits and sell their shares to them at an improved price.

So the point I want to make is that Level 2 is a useful tool for short-term share traders because it gives you a snapshot of the current number of buy and sell orders that are sitting on the order book. However it can be misleading at times, which is why you should exercise caution when using Level 2 share trading data.