What Level 2 Quotes Show and What They Leave Out

A Level 2 screen shows part of what the market intends to do. It lists the bids and offers that traders and market makers have chosen to display at prices beyond the best quote, usually several levels deep on each side, and it often tags each line with the exchange or firm that posted it.

Level 1 is the top line. It gives the best bid, the best offer, and the size at each, which in the US is essentially the national best bid and offer. Level 2 extends that downward. The bid column descends in price. The ask column climbs.

Reading the ladder

Here’s a small made-up book for a stock trading around 12.40. Every number in it is hypothetical.

Bid size	Bid	Ask	Ask size
300	12.38	12.41	200
500	12.37	12.42	400
1,200	12.35	12.44	600
800	12.33	12.45	1,500
2,000	12.30	12.48	900

Start at the top row. The spread is 12.41 minus 12.38, which is three cents. Then look at how quickly size builds as you move away from the price.

On this book the ask side is thin near the top: 200 shares at 12.41 and 400 at 12.42, with most of the displayed size sitting a few cents higher. The bid side has more shares close to the price. That says nothing about where the stock is going. What it does tell you is what your own order would do if you sent it right now, which is the question Level 2 answers best, since the screen is a snapshot of displayed liquidity and makes no forecast at all.

What a market order would eat

Say you send a market order to buy 1,000 shares into that book, and suppose nothing changes before it arrives. It takes the offers in order.

That gap is what depth is good for. In a liquid name the first level often absorbs an order this size. In a thin one, Level 2 shows you how far down the book you’d travel before you press the button, and it lets you decide whether a limit order at a price you choose makes more sense. The other signs are covered in telling whether a stock is too illiquid to trade.

What the screen leaves out

The sum above assumed the book was complete and would stay put. Real books are neither.

Start with hidden and reserve orders. Some venues let traders post orders that are invisible, or that show only a slice of their full size and refill as that slice trades. A line showing 200 shares may be the visible tip of a much larger order. You can’t tell from the screen.

Then there’s off-exchange volume. A meaningful share of US stock trading happens away from the lit exchanges, in venues and internalizing firms that don’t post quotes to the public book, and Level 2 doesn’t show those orders at all.

Orders also vanish. Quotes are canceled and replaced constantly. Size can appear at a level and disappear a moment later, sometimes as soon as prices move toward it, so a wall of bids that looks like support can be gone by the time the price reaches it.

And what you see depends on which venues your platform’s data covers. Some feeds show a consolidated view. Some show a subset.

Put those together and the displayed book is best read as a rough, partial picture of nearby liquidity. It can understate the size that’s really there and overstate the size that will still be there when you trade.

What traders actually use it for

Mostly three things. The spread, which you can see on Level 1 anyway. The depth within a few cents of the price, which tells you roughly how much size a market order would consume. And changes in that depth, watched closely in one or two names.

That last habit takes attention. Watching depth on a dozen tickers at once gives you a dozen flickering screens and no real read on any of them, which is part of the case for watching fewer stocks.

If your normal order is several times the size shown at the top level, that already tells you something about how to enter.