Level 1 Trading: Explained, Trading Screen Mechanics, and Availability



In this article, we will delve into the concept of Level 1 trading, its functionality on the trading screen, and its accessibility to investors. Level 1 trading is an essential tool used in stock trading that provides real-time quotes on the best bid-offer-volume information, commonly known as the national best bid and offer (NBBO). While Level 1 quotes offer basic information that suffices for most investors, more active traders often seek additional order book and market depth information available in higher-level quotes.

Understanding Level 1 Trading

Level 1 trading screens were relatively uncommon in the pre-internet era. However, with the rise of online trading, Level 1 quotes are now widely accessible, often free of charge. These quotes can be found on brokerage websites and financial news portals such as Morningstar or Yahoo! Finance. Typically, the information is sourced directly from exchanges or intermediaries acting as data brokers.

Reliable Level 1 quotes play a crucial role in helping investors secure favorable prices for their security transactions, especially in fast-moving markets. They enable investors to make informed decisions, particularly when opting for limit orders instead of market orders.

Long-term investors, who are less concerned about minor price fluctuations, usually find Level 1 quotes sufficient. Conversely, active traders aiming to capitalize on smaller gains often rely on Level 2 quotes to gather more comprehensive information.

Levels of Quotes

Level 1 Quotes

Level 1 quotes serve as the foundational level of quote data for a security, displaying the best bid and ask prices along with their respective sizes.

Level 2 Quotes

Level 2 quotes offer more extensive insights compared to Level 1 quotes by presenting market depth information. This level of quotes typically includes the 5-10 best bid and offer prices, enabling active traders to gauge the volume of buy and sell orders at various prices.

Level 3 Quotes

Level 3 quotes provide the highest level of market depth, showcasing up to 20 of the best bid and ask prices. In addition to this, users can directly input data. These quotes primarily serve brokers and market makers, granting them advanced functionality such as entering or modifying quotes, executing orders, and sending trade confirmations.

It is important to note that each level builds upon the previous one, with Level 1 quotes serving as the foundation. These quotes provide investors with real-time bid and ask prices for individual stocks, reflecting the most recent data derived from the exchange’s order book. Level 1 quotes are the most commonly encountered quotes that individual investors access through their financial services companies.

Level 2 quotes take the analysis a step further by incorporating market depth information into real-time quotes. This added granularity allows active traders to evaluate the volume of buy and sell orders at different price levels (depth) and identify the concentration of orders among market makers (order book). This level of detail is crucial for larger investors engaged in high-volume and high-frequency trades.

For instance, a Level 1 quote may display that Acme Co. has a price of $5.00, with an ask of $5.10 for 100 shares and a bid of $4.90 for 500 shares. Upon examining Level 2 quotes, an active trader might discover an order for 1,000 shares at $5.11 and observe that no orders exist below $4.90 until $4.85. This additional information can reveal a weaker market sentiment than what the Level 1 quotes alone might suggest.

Lastly, Level 3 quotes provide comprehensive information and services found in both Level 1 and Level 2 quotes. In addition, Level 3 quotes empower registered brokers and financial institutions to enter or modify quotes, execute orders, and send trade confirmations. Market makers, for instance, actively participate in Level 3 quotes, allowing them to execute customer orders effectively.

In conclusion, Level 1 trading offers real-time quotes on the national best bid and offer, providing essential information for investors. While Level 1 quotes cater to the needs of most investors, more active traders may utilize higher-level quotes to gain deeper insights into market depth and order book dynamics. The accessibility of Level 1 trading has significantly increased with the advent of online trading, empowering investors with vital information to make informed decisions in stock trading.

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