The Ultimate Guide to Level 2 and Time & Sales

For day traders, level 2 and time & sales are indispensable tools to gauge pricing to perform precision order executions. The pace and velocity of price updates coupled with tape reading can provide an edge for seasoned tactical traders seeking opportunistic liquidity pockets. When split second decision making and reactions are imperative, these two tools are a necessity for nimble and agile traders. Let’s take a deeper look into the mechanics and uses of these important components to a trader’s arsenal. 

What is a Level 2 Screen? 

A level 2 screen provides the market depth of prices and available shares at each price level sorted by market participants including market makers, liquidity providers and electronic communications networks (ECNs). The pace of bid/ask price updates can often reflect the momentum in the underlying shares. However, it’s important to note that pricing changes are not indicative of actual executed trades, but what is available at the moment. This distinction is vital so as not to get knee jerked into chasing prices solely because of the fast pace of level 2 pricing updates. The level 2 screen can be deceptive since the true available liquidity is often hidden or partially displayed with reserve/iceberg orders. To anchor in the reality of what trades are actually being executed, it’s crucial to have a time & sales window accompany the level 2 screen.

What is a Time & Sales Window?

While level 2 provides the pricing and availability of shares in a limit book format, the time & sales window reveals the actual trades that have been executed. The official recorded trades data is utilized to plot technical indicators on the charts. The time & sales window reveals the “truth” in terms of actual liquidity.  

Time And Sales Trading Window

Components and Level 2 and Time & Sales

Both tools should be used simultaneously to derive a complete picture of pricing behavior, supply and demand and liquidity. It’s normal to attach the time & sales window to the level 2 screen. Here are the basic components of each:

Level 2 Time And Sales Trading Screens

Level 2 screens are limit books with available bid prices on the left and ask prices on the right. Each bid/ask includes the market participant (market maker or ECN) along with their price and displayed available size. They are organized by the best bid and best ask pricing at the top (which is the level 1 bid/ask) followed by each incrementally greater priced outside bid/ask. This enables traders to get a quick view of potentially available liquidity beyond the level 1 best bid/ask price.  

Level 2 Trading Screen

Time & sales windows display the time stamp for each trade along with the price and order size executed. The price can also be color coded to reflect a sale on the bid (red) or buy on the ask (green). Sometimes block trades will be posted late in the afterhours along with numerous odd lot trades under 100-shares.

Level 2 Versus Charts

There is a very large distinction between level 2 and charts that traders must understand from the get-go. Level 2 illustrates the depth of market by displaying the bid and asks with sizes for multiple levels beyond the inside. The prices imply “intent” to trade but are not actual trades. These are not actual trades but potential trades. There’s lots of gamesmanship involved to “trick” traders into impulsively reacting to the perceived appearance of big buying or selling. The charts should be prioritized as a true gauge of price trends, support/resistance levels, trading channels and patterns.

Level 2 vs.Trading Charts

Do You Need Level 2 + Time & Sales? 

For active traders, level 2 provides an additional tool which is point-and-click order routing and execution. This applies to trading platforms with direct market access (DMA) brokers. The speed of execution is immediate along with the ability to mask order transparency with hidden orders and reserve/iceberg orders through ECN limit books. Most active day traders will need level 2 + time & sales for precision entries and exits. For some traders, the level 2 can be more of a distraction, especially if they have an affinity for impulse trades. Swing traders and longer-term investors will likely prefer to use conventional retail brokers if there is no priority for lightening fast fills with an emphasis on speed and liquidity. 

How to Analyze Level 2 Screens + Time & Sales 

Generally, mid and small caps and thinner liquidity stocks highly require level 2 and time & sales screens to discern true pricing and liquidity. Wide spreads can create a lot of slippage so the precision that comes with direct order routing and transparency control is paramount. Large cap stocks tend to provide so much liquidity that insights into price action can be muffled with the exception of large blocks being posted on time & sales. Always play the role of a third-party analyzing the battle between the bulls and the bears (supply and demand) and who is in charge at the moment.

Imbalances and Anomalies

When either the bids or asks are heavily stacked on level 2, pay attention to the true trade executions on time & sales. Many times, these stacked imbalances result in a climactic bottom or top as market participants are trying to shake the trees for the final hold outs. With time & sales, keep an eye out for large blocks and where they are priced (inside bid or ask). These blocks can be a sign that supply is diminishing. For example, a stock that has been selling off for the past hour prints several 100,000 share blocks on the inside bid on time & sales could indicate a heavy seller(s) have completed their sales. This is often accompanied by a jump in prices. 

How To Read Level 2 Time And Sales

Everything Isn’t What It Seems

Level 2 displays “potential” orders, not actual executed orders. This is why time & sales is absolutely necessary when watching level 2. ECNs also allow for hidden orders that don’t show up on level 2 but do show trades executed on time & sales. Be aware of hidden orders when you see trades printing at prices between the bid/ask. Reserve or Iceberg orders display a small size on level 2 while hiding the real size. For example, a seller may be trying to sell 5,000 shares of $XYZ on the inside ask, but only displays 100 shares. The reason for this is to disguise transparency so as not to trigger more sellers to step in front and stifle the momentum. On the flipside, be aware of flashers/spoofers that will display a large inside bid or ask size to trigger panic on the other side only to cancel their orders quickly. Again, time & sales will show whether these tactics are effective.

Level 2 Market Data

Be Observant

Use the combination of level 2 and time & sales to spot price inflection points. Is there a certain price level, ECN or market maker that continually acts as a support or resistance? Does a specific market participant continually cap the upside or downside price momentum? If so, make sure to also confirm it on the charts with technical indicators that validate price resistance or support.When it comes to large displayed sizes on level 2, pay attention to the time & sales to verify if they are real. A large seller that actually absorbs trades on the ask or gets taken out may be a real sign of demand. Whereas a large seller that continuously pulls the ask price may be someone just trying to manipulate the perception of selling pressure. Always analyze the prints on time & sales for the “truth” behind the level 2 pricing. What types of shares are being executed? Are they larger sizes or odd lots under 100 shares? Real demand or selling will absorb size and prove it on the time & sales. It’s prudent to include level 2 and time & sales in your arsenal of tools in conjunction with charts to round out a well balance trading methodology.

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