Level 2 provides a view of the full order book helping you to trade inside the spread and improve your timing.
Understanding Level 2 will also give you the necessary skills to use Direct Market Access (DMA) via your broker to trade on the other side of the spread.
Level 2 is provided free in ShareScope Pro and SharePad Pro. You can also add it to ShareScope Plus for £16 per month (or £170 per year).
If you are switching from another Level 2 provider, you'll need to decide whether ShareScope or SharePad is best for you. If you want to be able to open multiple Level 2 windows and have full trade data, you'll need ShareScope Plus or Pro.
Understanding Level 2 will help you spot trading opportunities and improve the timing of your trades.
Dominic Connolly, author of The UK Traders Bible says "to trade without Level 2 is like trying to drive blindfold".
When you deal via your stockbroker, you buy at the offer and sell at the bid (that is, you buy at the higher price and sell at the lower price). Brokers buy at the bid and sell at the offer. That's one of the key ways they make money. Some brokers allow private investors to do the same through Direct Market Access (DMA). Becoming familiar with level 2 is the first step to being able to use DMA.
However, just having access to Level 2 and an understanding of the price formation process, can help you to time your trades better or get a better price from your broker (dealing inside the spread).
Very impressive - ShareScope makes Level 2 really easy to read and interpret.Dominic Connolly, Author The UK Trader's Bible
By watching the prices and volumes of shares available on the bid/offer (market depth), by seeing how some market participants try to manipulate the order book, you can gain an insight into the price formation process.
As you watch buy and sell orders being filled, and new orders being added, you can see the pressures on the bid and offer and where order volume is creating support and resistance. With practice, you'll learn how to improve the timing (profitability) of your own trades. Even for longer term investors, Level 2 can help you make significant savings.
For less liquid stocks, level 2 allows traders to see which market makers are showing the most interest in a security, to identify the patterns for each market maker, and to see how liquid a stock is at any point in time.
You'll also be able to track price action during the opening and closing auctions. This can be a great time to trade at or near the day's high or low. Your broker may allow you to trade during this period.
For short-term traders, there are a host of trading strategies that go with Level 2 access. We recommend "The UK Trader's Bible" by Dominic Connolly.
Learning how the order book and auction process works will give you the necessary skills for Direct Market Access (DMA) - available from certain brokers. DMA enables you to participate directly with the market - entering your own buy and sell orders (i.e. you can buy at the bid and sell at the offer).