Level II (2) Quotes: Are they Necessary for You?

Level II quotes are a big selling point for most online stock brokerages out there. You will find that cut-rate costs for Level II quotes are a big selling feature for many online. But before you make a decision as to which online brokerage you are going to go with, you need to educate yourself when it comes to Level II quotes. What are they exactly? And are they really necessary?

Let's first take a look at a typical Level I quote. This is the quote that you are accustomed to seeing on TV or on Yahoo Finance. This is your typical, "10.50 / 10.53 -- 10.53." Meaning, the bid is currently $10.50, the ask is currently $10.53, and the last trade was at $10.53. This is your standard Level I quote.

Level II quotes are a bit more complex. When you view a Level II quote box, you can see all of the current orders. Meaning, you can see everyone that is lining up to buy (on the bid) and everyone lining up to sell (on the ask.) So for instance, you can potentially see 10 different buyers on the bid, and 10 different sellers on the ask. Goldman Sachs might have a bid in to buy 10,000 shares of XYZ at 10.30; they will show on the Level II quote screen. Merrill Lynch might have an order in to sell 10,000 shares at $10.75; this will show up in your Level II quote box. Using Level II, you can see the depth of the market. And by doing that, sometimes you can get a handle on how much buying and selling pressure there is likely to be.

If you are a daytrader, and 10 cents means the difference between a profitable trade and a losing trade, then you need Level II quotes. Operating as a daytrader without Level II quotes is like hurting down the highway at midnight with no headlights on; you are driving blind, and you'll end up in a huge crash sooner or later. If you plan on making intraday trades (buying and selling in the same day) then I would highly recommend that you get yourself Level II quotes.

On the flip side, if you plan on holding your trades for at least a couple of days or longer, then Level II quotes are something that are not necessary for you. They are interesting to watch, sure, but they will serve no purpose, as maneuvering in and out of stocks is not a big concern to you, as you are planning on holding onto the stock for a while.

So in order to determine the relevance of Level II quotes in your life, you need to ask yourself: am I an active trader, or more of a passive trader? If you classify yourself as an active trader, then go ahead and sign up for Level II quotes. Otherwise, they just aren't necessary.

Filed under: Stock Market Education | General Knowledge