A little background:
At its core, the stock market functions like a big auction house; Where buyers and sellers place orders to make trades.
An order is only executed when a Bid (price a buyer is willing to pay for a certain volume of a security) matches an Ask (price a seller is willing to sell a certain volume of a security at).
When a match happens, it becomes a trade and moves from the Bids and Asks Table to the Stock Price Performance chart. This chart represents all executed trades on that stock.
When you’re about to place a trade you want to gauge the availability for a stock at a certain price.
Level 2 Market Data:
Level 2 Market Data shows the real-time bids and asks for any security.
That means you get to see all prices buyers are willing to pay to buy a certain quantity of a security and also all prices sellers are willing to sell certain quantities of the same security at.
This helps you better determine the supply and demand for this security at different prices.
Without Level 2 market data you only get to see the best bid and best ask. Which is the highest price a buyer is willing to pay for a certain quantity of a security (best bid) and lowest price a seller is willing to sell a certain quantity of a security at (best ask).
A practical example:
So, let’s say you want to buy 1,000 stocks of CIB at market price. If you have level 1 market data, you will only see the best bid and ask prices and volumes.
- Best Bid: 300 shares at EGP 69
- Best Ask: 600 shares at EGP 71
This means if you place a market order, you will buy the first 600 shares for EGP 71. But, what about the remaining 400 shares? You will have no idea how much they will cost you. With level 2 market data, you get to see the available quantities that are next on the list and more.
What does this look like?
To help visualize this better you get to see all the orders on an in-depth chart.
The depth chart has two lines, one for Bids (Limit Buy orders) shown in green and one for Asks (Limit Sell orders) shown in red. The highest point on the right shows the Total Asks and the highest point on the left shows the Total Bids.
The Y-axis represents the aggregate number of shares available at a particular price. This shows you the volume of the orders that will be executed before you reach a particular price point that you choose.
The list you see under the graph is the list of top ten bids and asks set prices and their corresponding volumes.