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Level 1 vs Level 2: seeing the order book

Lesson 6 · about 8 min

So far you have seen the best bid and the best ask. Behind those two prices sits a whole queue of orders at worse prices, waiting their turn. That queue is the order book, and how much of it you can see is the difference between Level 1 and Level 2 data.

Level 1: the top of the book

Level 1 is what almost every free app shows you:

  • Best bid and its size
  • Best ask and its size
  • Last price and last size
  • Volume, open, high, low, and the previous close

It is enough for most swing traders and every investor. It tells you what you can trade right now, at what price, in what size.

Level 2: the depth of the book

Level 2 shows you the orders stacked below the best bid and above the best ask, typically five, ten or more levels deep on each side. A simplified stock book might look like this:

        BID                    ASK
 Size    Price          Price    Size
 400     50.00          50.02    300
 1,200   49.99          50.03    900
 2,500   49.98          50.04    2,100
 800     49.97          50.05    600
 5,000   49.96          50.06    4,400

Read it from the middle outward. The market is 50.00 bid, 50.02 offered. If you send a market buy for 1,000 shares, you take 300 at 50.02, 700 at 50.03, and your average price is about 50.027. If you send a market buy for 5,000 shares, you eat through 50.02, 50.03, 50.04, 50.05 and part of 50.06. That is what "walking the book" means, and it is exactly why large orders get worse prices.

Level 2 also usually shows which venue or market maker is posting each order (in US stocks, codes like ARCA, NSDQ, EDGX, or market maker IDs). In futures and crypto, orders are anonymous.

What Level 2 is good for

  1. Estimating slippage. Before placing a large order in a thin product, look at how many levels you would consume.
  2. Spotting thin books. If the top of the book shows 100 shares on each side and nothing else for several cents, a single order can move the price a lot. That is a market where stop orders get filled badly.
  3. Seeing where limit orders cluster. Big resting orders at round numbers sometimes act as soft barriers, at least until they are pulled.
  4. Gauging urgency. When the ask side is being lifted level by level and not refilling, buyers are impatient. When new asks keep appearing at the same price, someone is patiently selling into the demand.

What Level 2 is not

Level 2 is one of the most oversold tools in retail trading, so here is the honest version.

  • It shows displayed orders only. Large participants hide most of their size using iceberg orders (only a slice is shown), dark pools (not shown at all), and algorithms that only place an order the instant it can be filled. In US stocks, a large share of volume never appears on any lit book.
  • Orders are not commitments. A 50,000-share bid can be cancelled in a millisecond. Placing and pulling orders to create a false impression ("spoofing") is illegal in regulated markets but still happens, and in unregulated ones is routine.
  • It is fragmented. In US stocks, a full picture requires paying for data from every exchange. Many brokers' "Level 2" is one exchange's book, or the Nasdaq TotalView feed, not the whole market.
  • Futures books are the exception. Because a futures contract trades on a single exchange, the CME book really is the whole displayed market. That is why order-flow tools are more popular among futures traders.

Key idea: Level 2 shows you the displayed intentions of people willing to be seen. That is useful for judging liquidity and slippage. It is a poor guide to direction, because the biggest players go out of their way not to be seen.

Do you need it?

Your style Level 1 enough? Level 2 worth paying for?
Investing, position trading Yes No
Swing trading liquid stocks Yes Rarely
Day trading liquid stocks Mostly Helpful for entries in size
Trading thin small caps No Yes, to avoid terrible fills
Scalping futures No Yes, it is the whole market
Crypto on one exchange Often included free Already have it

For the first several months, Level 1 plus a chart is all you need. Add Level 2 when you can explain, in one sentence, a decision you would make differently because of it.

Time and sales

Level 2 is usually paired with time and sales (the "tape"): a scrolling list of every executed trade with its price, size and timestamp. The book shows intentions; the tape shows results. Watching both together is how traders read whether buyers are actually lifting offers or just posting bids that never fill. Again, it is a skill that takes months of screen time to be worth anything, and it is most meaningful in futures where the market is centralized.

Try it: Most brokers and many free charting sites offer a demo or delayed Level 2. Pick a liquid stock and a thin one. Count how many shares sit within one cent of the best bid and ask on each. Then imagine placing a 2,000-share market order into each book and write down your estimated average fill. That estimate is the whole reason Level 2 exists.

Recap

  • Level 1 is the best bid and ask plus last, volume and daily range; Level 2 adds the queue of orders at worse prices.
  • Large orders "walk the book" and get progressively worse prices, which Level 2 lets you estimate.
  • Displayed orders can be cancelled instantly and most institutional size is hidden, so Level 2 is a weak directional signal.
  • Futures books are centralized and more representative; US stock books are fragmented.
  • Start with Level 1; add Level 2 only when you can name the decision it would change.

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Bid-ask spread in an order bookSell orders stacked above buy orders with a gap between the best of each.SELLERS (asks)50.0690050.051,40050.0460050.011,10050.002,30049.99800spread = 0.03BUYERS (bids)
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.
Slippage on a market orderA buy order clears four price levels, so the average price paid is worse than the price first quoted.Buy 1,000 shares at marketpricesell orders resting (bar length = size)20.04300 shares20.03200 shares20.01200 shares20.00300 sharesnothing resting at 20.02order sweeps up the bookaverage fill 20.02SLIPPAGE0.02 a share$20.00 in totalintended 20.00Each level fills at its own price; the average is what you really paid.
Slippage on a market order. You click at 20.00, but only 300 shares are resting there, so the rest of the order fills at 20.01, 20.03 and 20.04. The average price paid is 20.02, and that two-cent gap is slippage.