Introduction to Level 2

The term Direct Market Access is used often in the industry and yet a lot of people do not know what it means or indeed how to use it. The term, in fact, relates to the use of the order book, a system used by market participants to trade directly with each other by inputting their sale and buy orders and waiting until they match. The system is more commonly referred to as Level 2.

The first major benefit of using Level 2 is that it is the main mechanism used by the market to trade. It is used by all of the major traders such as institutional investors, [[hedge fund]] s, and private individuals. Its benefits are significant as it enables market participants to buy at the bid and sell at the offer price. Consider the following example which is a screen print taken of the Level 2 screen for Carnival Corporation towards the end of last year.

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Before I go into more in-depth analysis I will briefly explain what the information displayed on the screen means:

• On the left hand side are shown the willing buyers of the stock, the number of shares they want and the price they are willing to pay (which is known as the bid price).
  
  
• The right hand side shows the number of willing sellers, how many shares they have to sell and the prices they want for their stock (the offer price).
  
  
• The yellow strip shows the keenest prices that are close to being filled. In this instance we have one person or institution that wants to buy 500 shares at £29.88 and three willing sellers with a total of 1,857 shares that they want to sell at £29.90.

Normally Carnival can trade with quite a wide spread, but on this occasion you can see that it is only two pence. So what does this mean if you want to buy the stock? With Direct market access you have two options and we will assume that you only want to buy one thousand shares. With the quote standing as it is, there are three different sellers who are willing to sell a total of 1,857 shares at a price of £29.90. If you were willing to pay this price and are fast enough in using the system it would be possible to buy your 1,000 shares now at £29.90.

Another option is that you want to pay £29.89, and by completing an order on the system your entry would change the quote on the yellow strip to £29.89 - £29.90, showing your willingness to buy at this level and all you now need to do is wait until someone comes along that is willing to sell at this level. Of course this is not your only option, you could input any lower price that you would like to buy at, but it will mean that your order will not be filled until those above who are willing to pay a higher price have their orders completed.