Day Trading & ScalpingEquities

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.

{$image001 alt="Lev2Screen"}

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.

We have considered buying some stock, but what about selling? As you would guess, the exact opposite happens. The orders on the right hand side show the number of willing sellers and the prices and volume they want to sell at. Now if you were selling 1,000 shares there are again several options available to you. If you wanted to receive a price of £29.88, there is one individual who is a willing buyer of 500 shares at this level. If you input an order to sell 1,000 shares at £29.88, this would mean you are left with a balance of 500 shares to sell and the quote on the yellow strip would change to £29.87 – £29.88 showing the 500 shares you have left to sell at £29.88 and you would have to wait until a willing buyer came along who wanted 500 shares at this price. It could be that other sellers could come along wanting a lower price than you and this could push the price down further leaving you with 500 shares unsold.

A second option would be to sell the 1,000 shares at the best price possible. The Level 2 system would then take the 500 shares on offer at £29.88 and sell the remaining balance at £29.87.You will see from the system that after the £29.88 level, there are 5 willing buyers of 2883 shares at £29.87, so there is more than sufficient demand to take your remaining 500 shares at £29.87. This would therefore give you an average price of £29.875 for the whole 1,000 shares. It could be that you want to sell at a much higher level of say £28.93 and in which case your order would sit on the right hand side of the book waiting to be filled. Until a willing buyer comes along your order will remain on the Level 2 system.

You can see from the quote for Carnival the depth of the order book which at this moment in time was not very deep. There were not that many buyers around so it would not have taken much selling volume to push the price down. This is something that you will learn to spot with experience and different stock prices will behave in different ways. Early in the morning when the order book is still getting up and running, volume can be quite thin and there is sometimes an opportunity for bargain hunting. A stock such as Carnival is very interesting to watch and can be very volatile because it is a high priced stock that can move on low volume. You can see just from this example how hedge funds could potentially move a stock price very quickly. The number of buyers at this moment was quite small and it would not have taken much short selling to push the price down especially if any negative news were to be announced.

Be Careful!

When using the order book be very careful when typing in your order. The order book is the market and any error inputting your requirements can be quite costly and very difficult to amend. For example, the simple error of typing in a price that you are willing to pay which is much higher than the current price may result in you paying a much higher average price than you should have done and this would be almost impossible to undo. Also be very careful with typing in the quantity, this is another area for making a silly mistake which will be very difficult to unwind.

Partial Fills

This is an important factor to consider. If, for example, you placed an order to sell your 1,000 Carnival at £29.90, but only 500 were sold before the price fell, you will have paid commission on a partial sale at that level, but if you were to amend the price to a lower level at which you were willing to sell the remaining holding, this will be considered to be a new order and you will pay a second lot of commission. If you are dealing in a sizeable amount, the impact of this will not be so great, but it will add up for smaller trades. The answer is to watch the market very carefully to ensure that you get the price you want for all of your stock.

Quote Driven Alternative

The alternative to using  Level 2  is a quote driven system. This is basically as it says a pure quote without any details about market depth as you get with Level 2. All brokerages will operate some form of quote driven system based on the underlying market quote derived from what is happening on the Level 2 system. What you have to be very careful of is that because you are deemed to be an intermediate customer, the brokerage is not obligated to give best execution which basically means that the quote they offer to you may differ fractionally from the underlying market. This means that, for example, British Airways could be quoted at £2.05 to £2.06 in the market, but a quote driven system may offer you £2.0475 to £2.0625, the broker then keeps the difference.

This is why some brokers will offer a deal for free service. The reason it is free is that the broker has increased the spread around the underlying market price which enables them to make a profit on your transaction without having to charge commission. It always pays to find out exactly how your broker works, it can save you a lot of money in transaction charges.

Andrew Collins has spent the last 10 years working in the City as a fund manager responsible for running charity funds.He now runs a company called CM Financial Consultants which is involved in various aspects of the financial services industry including advising individuals and corporates on the CFD market and the products and services which are available. He also works for the industry CFD website

Andrew Collins has spent the last 10 years working in the City as a fund manager responsible for running charity funds.He now runs a company called CM...


Experienced member
1,159 42
A good start, I (and I reckon a good few more) would appreciate some further work on 'this is how to read the screen' so those with a L2 feed have a better idea of determining the short term future?
( I appreciate this is a 2000 page volume! I for one, despite having L2, am as yet unconvinced it is of any use to me... shock horror confession time... I don't trade brief instants in time, I'd like to look at L2 and see the likely course of the next 2-3 bars, and would appreciate anything you'd care to add in that direction.

To end this - thanks, I knew most of if not all of this anyway, but I think this basic level info is something often overlooked and a decode of what the screen shows from somebody who uses it is of real merit. A trader without L2 feed is going to be wondering if that is the magic bullet that makes them profitable - info on it will lead to more aware traders... I don't think the overall win% of T2W members will go up, but those who are going to hack it will get there a little quicker, so thanks for posting this.



Well-known member
340 0
Nice intro to the SETS order book and level II, but the prices are a pound out in the text compared to the screenshot.


702 14
OK - so here is a dumb question - what happens if there is no willing pair of buyers and sellers at the going price? Say the share normally has a spread of 5 cents, but at the current moment the bid and offer are 50 cents apart. Is there such a thing as a null tick? A tick where no transaction took place? I can see where this could happen on a thinly traded stock.

How about futures, where the spread is regulated by the exchanges? Are those markets so liquid that someone is always willing to pay the going price? If there is a larger gap between bid and ask orders on the depth of market window, how is that resolved?

Thanks in advance,


8,655 981
For a trade to happen you have to have agreement to exchange at a specific price and if not then the trade cannot happen. If people are not willing to buy at a particular price then only two things can happen.

1) No trade takes place at that price

2) The price drops until someone is willing to buy at a low level price.

Of course this is simplified and in a fast moving market things happen so quickly that making an assessment of this process is too quick to see. On thinly traded stocks it is easier to see this process in action.



Legendary member
8,394 1,170
The only time I've see a spread that wide on LII is after the end of normal trading hours on a stock that has made a massive (normally down) move on the day. Is it tradeable? Depends on whether you believe it will gap down on the open tomorrow - or not.


Senior member
2,666 30
Some brokers allow you to amend partial fills and keep it part of the same order


Active member
206 6
in the example which is a screen print it shows the yellow strip at
1 500 2888.00 2890.00 1857 3
yet you state the yellow strip shows 500 shares at a buy price of of 2988 and 3 willing sellers with a total of 1857 shares they want to sell at 2990
Is this a missprint ?
it's not a match of price 2880. 2990.00 ?
if possible please reply .
regards twigglet


Experienced member
1,159 42
Try shifting the price to 2888 - 2890.. as noted above the text and screenshot are slightly out of whack, doubtless a small typo


Well-known member
442 9
Does using direct access mean you need a higher level of skill (i.e. more time and effort needed) to place orders in order to beat the yellow strip OR if the skill level is not there is it best just to use a big broker who can get the best prices from the Retail Service Providers (which generally beat the yellow strip by a bit 0.2%ish)?


Well-known member
353 35
Does anyone know whether Level 2 shows the full depth of the order book and the difference with Level 3?