Market data is fundamental for developers building financial and trading solutions. It enables accurate tracking of prices, trading volume, and order flows. For developers creating financial software, accessing varying depths of data significantly impacts the quality of their applications.
Here, we'll explore Level 1, Level 2, and Level 3 data, highlighting their differences, use cases, and importance.
What is Market Data in Stock Trading?
Market data consists of trading-related information for various securities, including the latest commodity price, trading volume, highest and lowest prices, and sales data. Trading professionals rely on it to make informed decisions, determine trading strategies, and identify trends.
Level 1 Market Data: Basic Information
Level 1 provides fundamental information, typically including:
- Current price of a commodity
- Best bid (current best bid)
- Best ask
- Trading volume
This level provides users with essential up-to-date information, suitable for most casual stock exchange fans and applications requiring basic stock trading insights.
Common Uses of Level 1 Data
Level 1 is ideal for:
- Retail investors
- Casual traders
- Financial applications providing basic price tracking
- Technical charts displaying stock prices
It helps identify general conditions on the exchange and offers a quick snapshot of stock performance.
Although useful, Level 1 lacks depth. It doesn't provide visibility into different price levels or the complete order book, limiting the ability to see the complete situation of listed securities and identify large outstanding or hidden orders.
Level 2 Market Data: Greater Depth, Insights and Market Maker ID
Level 2 market data offers a detailed view, extending beyond the current best bid and ask into other indicators. It displays additional information, like multiple price levels for bids and asks, providing deeper insights.
Traders can leverage Level 2 data to their advantage by analyzing market depth, determining the time of trades, and identifying levels of support and resistance.
Components of Level 2 Data
Key aspects of Level 2 market data include:
- Bid and ask prices at various levels
- Sizes of orders at each level
- Market maker ID information
Level 2 data offers bid prices and other price quotes from market makers, emphasizing the credibility and legitimacy of the market makers involved.
Market maker IDs in Level 2 market data help identify the activities of particular market makers, indicating potential pressure to buy or sell. This visibility can influence trading strategies, especially when whale orders appear.
DOM Window and Level 2 Data
The Depth of Market (DOM) window visualizes Level 2 data by presenting all active bid prices and ask prices alongside order sizes. Developers creating financial tools use it extensively to display a clear, comprehensive snapshot of market depth. This detailed information enables tracking market maker behavior and gain insights into potential price movements.
Despite its depth, Level 2 data doesn’t fully disclose order identities or intentions, which can sometimes hide large orders . Traders may still encounter hidden orders, making the DOM window less transparent in situations involving high liquidity or large, hidden transactions.
Using Level 2 Data in Trading Strategies
Day traders heavily rely on Level 2 data for:
- Identifying support and resistance levels
- Detecting hidden orders or attempts to hide large orders
- Tracking levels of prices and how liquid stocks are
- Spotting trends and predicting stock price movements
Traders should be cautious when interpreting Level 2 data, as large orders can be canceled before execution, creating misleading signals about market support.
For example, traders monitoring low liquidity stocks use Level 2 data to gauge demand and liquidity by observing the number and sizes of outstanding orders.
Level 2 Data in Action: An Example
Imagine a highly liquid stock. Level 2 market data indicates substantial bid volume at specific levels, suggesting strong support. Conversely, heavy ask volume at higher levels signifies resistance.
Users leverage this information to refine entry and exit points. However, it does not necessarily guarantee that the displayed order sizes and price levels will reflect the trades executed.
Level 3 Market Data: Complete Transparency
Level 3 data delivers the most comprehensive view, often exclusive to market makers and institutions. It includes detailed order book information including orders which are open, identifying traders by name and showcasing order intentions explicitly.
Components of Level 3 Data
Level 3 data includes:
- Detailed open order book
- Complete bid and ask details
- Trader identities
- Outstanding order intentions
This transparency allows institutional traders to gauge precise conditions on the exchange accurately, along with other indicators available in Level 3 data .
Use Cases for Level 3 Data
Level 3 data serves primarily:
- Market makers
- Institutional traders
- Advanced algorithmic trading applications
They are using Level 3 data directly to observe other participants' order intentions. Such explicit transparency facilitates precise trading strategies, minimizing guesswork around order execution.
Level 3 Data in Action: An Example
Consider an institutional trader monitoring a stock experiencing significant volatility. With Level 3, they access the complete order book, clearly viewing orders which are open, trader identities, and their outstanding order intentions.
For instance, a large institution plans to sell a substantial position and places a significant sell order at a certain level. With Level 3 visibility, other participants immediately see this intention, prompting reactions such as adjusting their own bids or sells accordingly.
This full transparency helps institutional traders anticipate substantial moves by other players and strategically time their trades to optimize execution and minimize market impact.
Why Developers Need Level 2 and Level 3 Data
Developers building trading solutions must have access to Level 2 and potentially Level 3 data for several reasons:
- Enhancing accuracy of trading algorithms
- Offering advanced analytical tools
- Improving liquidity assessment capabilities
Level 2 data allows developers to identify the sources of orders through the 'market by broker' view, providing insights into trading activity from different participants.
High-quality financial software often depends on deeper insights into prices , providing competitive advantages through improved order execution and trading efficiency.
"Building powerful financial solutions starts with access to accurate, detailed information —empower your application with transparency."
Price Levels
Level 2 and Level 3 clearly outline different price levels, showcasing market depth. This helps developers build features to measure liquidity accurately, helping to understanding the real-time demand and supply dynamics.
Impact on Trading Decisions
With detailed data, trading professionals can better interpret technical charts, identify patterns, and make timely trading decisions. Recognizing action around specific levels enables effective trading strategies, such as buying near support levels or selling near resistance threshold.
Identifying Support and Resistance Levels
Level 2 data helps to accurately identify support and resistance levels by observing the highest and lowest prices as well as price levels with significant bid and ask volumes. This precise view enables to place informed buy or sell orders.
Detecting Hidden Orders
Hidden orders remain a challenge, but Level 2 market data helps identify anomalies or large, concealed order sizes, giving an edge in anticipating future moves.
Technical Charts and Price Information
Advanced technical charts often incorporate Level 2 and Level 3 data for low liquidity stocks , displaying comprehensive price information and order flows. This detailed integration helps to visually analyze depth of the market and liquidity.
Bid and Ask Prices and Market Depth
Bid and ask prices across multiple levels also illuminate market depth, allowing to spot liquidity clusters and make quick decisions based on detailed up-to-date information.
Access to Market Data: Considerations for Developers
Developers must consider the data depth their solutions require. While Level 1 suffices for basic trades tracking, advanced trading applications demand Level 2 or Level 3 to provide meaningful insights.
Typically, brokers require to pay extra for Level 2 and Level 3 due to their increased detail and utility. Developers should factor these costs into their product design decisions. There are some developer-focused solutions like FinFeedAPI which do not charge extra for access to levels beyond Level 1 - developers should consider prioritizing them to avoid paying exorbitant sums.
Additionally, developers should consider the ability to view market data for different symbols, detailing the best bids and asks associated with each symbol, as well as the depth of the market for ongoing orders.
High-quality financial software depends on thorough insights—Level 2 and Level 3 aren’t optional; they're foundational.
Conclusion
Access to accurate and detailed data significantly influences trading effectiveness. Level 1 serves basic needs, Level 2 provides deeper insights essential for active traders, and Level 3 offers complete transparency for institutional applications.
Understanding these differences helps developers create targeted, powerful trading solutions that empower users with the necessary tools to succeed.
