What Are Level 2 Stocks?
The NASDAQ stock exchange does not have a physical location. Rather, it is a network in which all buy and sell transactions take place electronically. Level 2 is a NASDAQ system that allows buyers and sellers to see the top few buy and sell orders for stocks listed on the NASDAQ exchange; thus, a Level 2 stock could be any stock that is listed with NASDAQ.
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Level 2 Basics
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If your broker provides you with real time stock quotes via your online brokerage account, you might be able to see the most recent bid and ask price for stocks at any given time. A bid is the price buyers are willing to pay and an ask is the price at which sellers will sell. Level 2 is a premium system that you can order from many online brokers. It gives you a deeper view of a stock's trading activity. In addition to the top bid and ask quotes, Level 2 allows you to see the next few bid and ask prices, as well as how many shares are being offered at each price.
How NASDAQ Operates
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NASDAQ has three groups of participants. Each NASDAQ stock has a market maker, who helps match buy orders with sell orders and who will trade from his own account if there are no close matches. Next, there are electronic communications networks, which are privately owned computer quote systems that place brokerage house orders electronically. Finally, there are order wholesalers, which are used by many online brokers to place their client's orders. Level 2 reveals active quotes for all three groups.
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The Ax
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A NASDAQ stock can have more than one market maker, but one market maker usually takes the lead. The lead market maker is sometimes referred to as the ax. The ax controls the momentum of buy and sell transactions by establishing the top bid and ask prices from all the ECNs, market makers and wholesalers. If you watch the Level 2 quote screen for a stock, you can usually determine which participant is the Ax, as she will be the one that is most consistently offering the top bid and ask prices.
NASDAQ TotalView
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As of 2010, for investors who wish to have access to even more quote information than Level 2, NASDAQ TotalView is now available. TotalView is a quotation system much like Level2, but it reveals the total order book at any given time as opposed to just the top few bids and asks. TotalView reveals up to 20 times more information than Level 2, allowing investors and traders to see how much buyer and seller demand exists for a stock.
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References
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