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Using Level II Data

What are Level 2 Quotes?

Level 2 data can be a powerful weapon in the hands of a penny stock trader, as it helps him chose how to best buy or sell his OTC securities.  Whereas Level 1 data traditionally shows the basic information of bid price, bid size, ask price, ask size, last price and last size, Level 2 data will show the highest 5 or 10 bid prices, the number of contracts available at each of the highest bids and the 5 or 10 lowest ask prices and the number of contracts available at those prices. This is important data to know when day trading OTC securities.

level 2 quotes

Level 2 market data is necessary to trade using other trading systems and can provide real insight into a stock’s order flow (buy and sell orders placed), price trend and more. Another valuable by-product of Level 2 information is the ability to track the open interest in a particular stock. The open interest is the number of option contracts that are not closed or executed from a particular day and the number of buy orders placed before the market opens.

OTCBB Level 2 Quotes

In general, there are three types of firms who actively trade a particular security: market makers, electronic communication networks (ECN) and wholesalers.As regards OTCBB markets, their liquidity is provided mostly by market makers. Since liquidity is crucial for penny stocks, market makers act an essential role on the OTC and Pink Sheets markets. Without market makers, the penny stock market would barely function. The bids from market makers represent a key part of OTCBB level 2 quotes.

ECN are simply computerized systems that place orders for large and small customers alike and Wholesalers are firms who place orders on behalf of large institutional trade organizations.Each of the firms mentioned above has an ID code known as an Market Participant ID (MPID). For example the Bank of New York’s MPID is BONY and Ameritrade’s MPID is FOMA. A list of FINRA approved MPID’s is available online at

An example of a Level 2 quote looks like this:

Level II Quotes for Penny Stocks

Whereas, Oscar Gruss and Sons has placed a buy order for 500,000 shares at $.0214, UBS Securities has placed a buy order of 100,000 shares at $.0212, etc. Conversely Ryan Beck and Co has placed a sell order of 2,000,000 shares at $.0211, Sweeney Cartwright and Co has placed a sell order for 1,000,000 shares at $.02115,etc.

How Penny Stock Traders Can Use Level 2 Quotes?

With Level 2 quotes a penny stock trader can tell what type of buying is occurring on the penny stock marketplace and whether retail buyers or institutional buyers are setting the prices and volume for the targeted penny stock. These large market participants will often hide trading activity by placing many small orders and updating them when they fill. If a market maker is trying to accumulate several million shares of a particular stock, they are better off placing dozens of 100,000 share orders rather then 1 large order and risk tipping off other institutional and retail buyers. With Level 2 quotes and knowledge of regular trading patterns for a stock, a penny stock trader will recognize when market makers or ECN’s place orders which appear to be small, but are actually attempts to accumulate or sell large blocks of a security.

Market MakersAnother use of Level II quotes is to determine how large institutional buyers and sellers are positioned with a particular penny stock. If after several weeks of observing a particular organization continually make profitable trades and you want to follow this organizations trading patterns, you will have the ability with Level 2 quotes to do this. If you trust the trading philosophy of Morgan Stanley, with Level 2 quotes, you are able to follow and track Morgan Stanley’s positions with a particular stock.

Continuing with the topic of institutional investors, if one particular market participant trades large volumes of a stock on a regular basis, they will inherently control the marker for that stock. Some people refer to this organization as the Axe. The Axe market maker is the one who receives and places most of the big orders from institutional investors and controls the price of the security. Once you have identified who the axe is for a particular stock. It is usually a good idea (not always), to follow the direction of the axe. If you see the axe accumulating stock so should you, but don’t get over zealous. Market makers and other market participants have different strategies and deep pockets to exact trading profits. Simply use good judgment and go along for the ride, close the position and take your money off the table.

Common Traps of Level 2 Quotes

Using Level 2 quotes for day trading can be extremely beneficial when combined with other strategies. Remember, Level 1 and Level 2 quotes are simply sources of information, not an exact science on stockpicking. Smart institutional investors and market participants can use the same information provided by Level 2 quotes as a means of deceiving retail clients while they profit from their mistakes (hence my comment above “don’t get over zealous”). For example, a market maker might place a large order to draw in retail buyers and other institutions and then quickly cancel the order and profit by shorting the stock as the retail buyers sell their positions to get out of the stock and the stock price sinks. There are a plethora of other tricks market makers will use to deceive the market. So, helpful as they are, Level 2 quotes are not foolproof and are not an exact science. It takes experience and education to use them to one’s advantage. They also should not be used solely as the decision maker for opening and closing positions.

Many brokerage and service firms offer Level II stock quotes free with an active account; some will charge a small fee. Level II quotes give a day trader good insight to order flow and where the institutional buyers are positioning themselves. Use Level 2 quotes to your advantage, but be careful not to get taken in by the experts on the Street. With practice, Level 2 quotes will enhance your trading experience and increase the chance of profitable trading activity.

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