Level 1/2/3 Market Data – What is it and How to Use it in Trading

Market data, also known as the ‘order book’, is a real-time view of prices and orders submitted to an exchange. It shows what buyers and sellers are willing to pay or accept for a security or any particluar asset, and how much they’re trading. There are three main levels of market data, each offering a different depth of information: Level 1, Level 2, and Level 3. FOREX.com, however, does not offer level 1/2/3 data. We operate as a market maker, meaning we are the counterparty to client trades and we execute orders at the prevailing market rates, based on our liquidity providers. The information below is provided for general educational purposes only. 

In this guide, we explore what information is provided in each of these levels, how they differ, and how you can use Level 2 market data for trading.

Definition of Level 1, Level 2, and Level 3 market data

Level 1 market data

Level 1 is the most basic and widely available form of market data. It includes:

• Best bid and ask prices: The highest price a buyer is willing to pay and the lowest price a seller is willing to accept
• Bid and ask sizes: The number of shares or contracts available at those prices
• Last traded price and size: The price and volume of the most recent trade.

Level 1 provides enough information for beginner traders and long-term investors who just need a snapshot of the market to place basic buy or sell orders. You’ll often be able to access it for free through most brokers, trading platforms, or financial news websites.

Level 2 market data

Level 2 market data builds on Level 1 by showing market depth, which is all the outstanding buy and sell orders near the current market price. It includes all the information in Level 1, plus:

• Multiple bid prices below the best bid, and the sizes available at each level
• Multiple ask prices above the best ask, and the sizes available at each level
• The identity of market makers or electronic communication networks (ECNs) posting those orders.

Some traders believe this level of detail provides some insight into the supply and demand behind a price move, and sometimes use the data to spot support and resistance levels, track order flow, and anticipate short-term price changes. Level 2 data is often used by active traders who try to understand the ‘why’ behind price movements. It’s usually accessed via a paid subscription, although some brokers offer Level 2 data for free.

Level 3 market data

Level 3 is the most detailed level of market data and typically reserved for market makers and institutional traders. It includes:

• Full access to the entire order book
• The ability to enter, update, and cancel orders directly
• Visibility into both public and private quotes.

Some feel this level of data allows institutions to manage large order flows, control liquidity, and interact directly with the market. It’s significantly more expensive than Level 1 or 2 and requires exchange membership.

Level 1 vs. Level 2 vs. Level 3 market data

Level 1 vs. Level 2 data

Level 1 market data, sometimes called ‘top-of-book’ data, shows information like the last traded price, best bid and ask prices, and bid and ask sizes. It gives you the current market price and whether there’s enough volume at that price to fill your order.

Level 2 market data adds market depth, which is the list of outstanding buy and sell orders above and below the current price. This includes multiple bid/ask levels, order sizes at each price point, and market maker or ECN identifiers that show where the orders came from.

Many active traders feel this level of information provides more context. When you can see the displayed market depth showing buy and sell orders at multiple price levels, some traders feel it helps gauge whether prices are likely to break through support or resistance.

Level 2 vs. Level 3 data

Level 3 market data contains all the same information as Level 2, plus the ability to enter new orders directly into the market, edit existing orders, and cancel orders in real time. It also provides the full order book, including trader identities and outstanding order intentions.

With this level of transparency, professional traders can see who has active orders in the market, the size of those orders, and the price levels at which they are working. Level 3 data is not typically available to retail traders.

Components of Level 2 market data

There are four main components of Level 2 market data: market depth, liquidity, bid-offer spread, and trade timing.

Market depth

Market depth refers to the number of price levels visible in the order book. With Level 2 data, you can see multiple bids below the current best bid and multiple asks above the current best ask, along with the size of each order.

Many traders believe this transparency helps you assess buying and selling interest for a particular stock. For example, if the highest bid is significantly higher than the next bid down, that could indicate weaker support and a greater risk of a price drop.

You wouldn’t be able to see this price gap with just Level 1 data, since it only shows the highest bid. So the depth of Level 2 provides more information, which helps some traders decide where to place orders.

Stock liquidity

Markets with low liquidity can make it more difficult to buy or sell stocks, often leading to longer execution times and potentially greater risk of negative price impacts. Thinly traded stocks with low liquidity often have wider spreads, fewer orders, and slower execution, which can make them riskier.

Level 2 market data shows how quickly orders are being filled and replaced. If new bids and asks appear constantly, it can be a sign of high liquidity. If the order book stays relatively stagnant, it means liquidity is lower. This could lead to slippage when you trade.

Bid-offer spread

The bid-offer (or bid-ask) spread is the difference between the highest price a buyer is willing to pay and the lowest price a seller will accept. Level 2 data lets you see how tight or wide this spread is across multiple price levels.

When the bid-ask spread is tight, it suggests a liquid market with competitive pricing. This can make it easier to enter and exit positions without significant cost risks, though execution quality varies depending on market conditions. If the bid-ask spread is wide, it suggests less liquidity and potentially higher transaction costs.

Some traders find this information can be useful for using microstructure strategies, as monitoring spread compression (when the spread narrows) can be used to identify potential entry points.

Trade timing

Level 2 data also shows the speed at which orders are being placed, filled, and replaced.

Participants visible in Level 2 data

There are three main types of participants you’ll encounter in Level 2 market data: market makers, ECNs, and wholesalers.

Market makers

Market makers provide liquidity in the marketplace. Their job is to continuously quote both buy (bid) and sell (ask) prices and to step in when there are no other buyers or sellers. This can help trades be executed more quickly and efficiently, sometimes even when the market is less active.

Electronic communication networks (ECNs)

ECNs are automated systems that match buy and sell orders electronically, without the need for a human intermediary. Anyone from retail traders to large institutions can route trades through ECNs.

Wholesalers and order flow firms

Wholesalers are intermediaries that execute trades on behalf of online brokers. Many commission-free brokers will sell their order flow to wholesalers, who then either fill the orders internally or route them to the market.

Benefits of using Level 2 in trading

One benefit of Level 2 market data is that you can view more detail than what’s available through Level 1. Let’s take a look at how these additional insights can be beneficial.

More accurate supply and demand data

Level 2 market data displays visible outstanding orders around the current stock price. With this price information, you can see whether there are more outstanding orders to buy a security or sell it at prices around the current best bid and ask.

Monitoring these orders in real time some traders feel can gauge current sentiment and help potentially anticipate how the market might react to certain price levels. Keep in mind that some types of orders, like direct trades or dark pool activity, won’t appear in Level 2 market data.

More accurate liquidity data

Level 2 data also shows how much liquidity there is for securities at different price levels. Larger outstanding order sizes usually mean a security is more liquid, and vice versa. This information will let you know if there’s enough liquidity to fulfil your trade at the price you expect, however price levels can change quickly and slippage can occur in all execution models.

Identification of significant price areas

Some traders believe Level 2 market data can help to spot potential support and resistance levels before they appear on a price chart. If there are price levels with high outstanding demand or supply, it could point towards potential future support or resistance zones.

For example, if a stock usually trades in lots of 5,000 shares and you see an outstanding order for 50,000 shares, the stock may hit support or resistance at that price level. Some traders use these support/resistance zones to plan trade entries, set stop-losses, or target exits, however it’s important to regularly monitor data to make sure outstanding orders don’t change significantly before you place your trade.

Some traders feel they can use this information to distinguish between retail and institutional activity, since large institutions often use different market makers than retail traders.

How to read level 2 market data

Level 2 windows are typically split into two main sides:

• Bid column (left): Shows the prices buyers are willing to pay, ranked from highest to lowest
• Ask column (right): Shows the prices sellers are willing to accept, ranked from lowest to highest.

In between, you’ll often see columns for:

• Size: The number of shares or contracts available at that price level
• Market maker/ECN IDs: The participant posting the order (i.e. market maker, ECN, wholesaler).

Each row represents a price level where orders are waiting to be filled. If you see large order sizes at a particular price level, it could indicate strong buying or selling interest at that level.

Keep in mind that Level 2 data won’t necessarily show all the orders. Large institutional investors often hide big orders by using ECNs or splitting them into smaller ‘blocks’ which are released gradually (known as an iceberg order).

Common tactics and deception in Level 2 trading

While Level 2 market data can give you some valuable insight into supply, demand, and market sentiment, it’s important to know that not everything you see in the order book is genuine.

Here are some common deception tactics to watch out for in Level 2 market data.

Order size manipulation

Market participants can try to influence other traders’ decisions by placing orders without intending to execute them. This might include:

• Spoofing, where large orders are placed to create the illusion of strong buying or selling pressure, then cancelled shortly afterwards
• Layering, where multiple orders are placed at different prices to create a false impression of market depth and induce reactions from traders
• Iceberg orders, where a large order is broken up into smaller ‘blocks’ which are gradually released so that the full order size isn’t obvious to the market.

Hiding true order intent

Large traders might try to hide their activity by using hidden orders or trading through ECNs. Because ECNs can be used by both retail traders and institutions, it’s difficult to tell who’s really behind a large order. This anonymity makes it easier for big players to accumulate or unload positions without the broader market knowing.

Rapid order cancellation

Market makers can also hide their order sizes by placing small orders and updating them repeatedly. This can help them disguise a much larger position.

For example, instead of showing a single 500,000 share sell order, which might scare off buyers, a trader might keep posting a visible 10,000 share order at the same level, refreshing it every time it’s partially filled. This might look like a small, beatable barrier to other traders, but in reality it’s absorbing a massive amount of buying before the price can move higher.

How to use level 2 market data in trading strategies

Using Level 2 to identify entry and exit points

Level 2 shows where there’s heavy buying or selling interest in the order book. You can use this information to find good places to enter or exit a trade.

If you see large bid orders stacked just below the current market price, that’s often a sign of support. It suggests that if the price dips to that level, its possible buyers may step in and push prices back up.

If there are large ask orders stacked just above the current price, some traders may interpret this as a sign of a potential resistance level, suggesting the price may struggle to move past that point.

Using Level 2 in scalping and day trading

Scalping and day trading is all about potentially capitalizing on quick bursts of momentum. Some traders believe Level 2 data can help identify potential bursts forming.

That said, beware of spoofing, when a trader places a huge order to create fake pressure then cancels it before execution. Spoofing is prohibited trading activity and considered market manipulation.

Using Level 2 with technical indicators

As we’ve mentioned, Level 2 data doesn’t show all orders, and it’s possible for orders to be manipulated. For that reason, there’s no perfect way to interpret Level 2 data on its own. Some traders believe it is best to combine the information you see along with other tools, like technical analysis, to confirm your trading decisions.