What Are Nasdaq Level II Quotes Good For?

by Manny Backus, Day Trading Strategy Expert

NASDAQ Level II quotes are available through most platforms.  They enable you to view, in depth, the various amounts of shares bid for or offered at various prices. This enables you to make better decisions on price movements.

NASADQ Level II quotes delineate a list of bids and asking prices in rank order.  It is used primarily for NASDAQ stocks.  In addition, having the ability to view Level II quotes also gives you insight as to which stock is showing the most interest by traders. 

A typical Level II quote will indicate the name of the company, the price, and the number of shares.  For example, Merrill Lynch would be seen as MLCO and Goldman Sachs would be listed as GSCO.  When incorporating ECN or Electronic Communication Networks, which is part of how a day trader may place an order, it should also be understood that ECN can be utilized by anyone.  Thus, the Level II quotes are signified by a four-letter ID as mentioned earlier.

By keeping abreast of the Level II action, you can determine who the market maker is that is controlling the price of the stock.  In fact, experts state that day traders often trade with the market maker because it yields higher profits.

NASDAQ Level II quotes also help to determine exactly how a stock is performing.  For example, you can ascertain of an institution is making a trade, or a retail trader is moving the stock.  How can you tell who is moving the stock?  By checking the ECN orders for any peculiarities so that day traders will immediately be signaled that larger institutions are either buying or selling stock in large quantities.
Another way to use Level II quotes is to look for any type of trade which is taking place between the bid price and the ask price.  In this way, you can determine if a strong trend is going to end.  Large traders usually take a small loss to ensure they sell a particular stock within a certain timeframe. 

Most day traders use the NASDAQ Level II quotes because it is a resource which can immediately tell them how a stock is moving.  However, as there are many tools and resources used by day traders such as: technical analysis, charts, graphs, and the like – it seems as if the Level II is just one of many tools used by traders to determine which direction a stock is going.  This enables them to buy or sell accordingly.
To explain this more clearly, according to hardrightedge.com, a similar question was posed and answered.  The following question was asked: “How can I interpret the changing spreads I'm watching on NASDQ Level II? How can understanding this tool help my trading?”  The answer given stated: “I don't believe you can predict direction from Level II quotes (these show you all bid/ask spreads from market makers, not just the narrowest). The best thing you can do is to predict interest and liquidity. Different stocks have different personalities on the tape.  Some stocks trade very wide price ranges for their float. The spread changes during different times of the year, as average volume fluctuates.  Realize you're not seeing true supply and demand on Level II.  Most exchanges and ECN’s have ways to hide order size, so you're actually seeing a lie. The best way to use Level II is to trade against its directional movement, as long as it's approaching a key level on your setup chart.”

It seems, therefore, that while day traders incorporate NASDAQ Level II quotes, it is not the only resources they rely upon. 

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