To The Moon

The stock market can be a confusing place for a novice investor. So, to make things simpler to understand it's easier to think of it as an apple market. Let's take the price of apples (we've slightly inflated the price to illustrate our point) as the primary example of how to choose when to buy at a good price. When you walk in, you will see the supply and demand for the apples already taking place between buyers and sellers. Someone is selling a bag of apples, someone is selling a box of apples; someone is bringing a bag to buy some apples, while the other buyer may just be using their hands to carry them. There is a lot of bargaining occurring, buyers will tend to offer a lower price, while sellers tend to ask for a higher price, which is quite natural, but they will somehow reach an agreement.

What price would you offer for an apple, if you only know the highest bid and lowest ask?

You would probably feel uncertain as to what price would be deemed appropriate to offer the apple seller.

You notice that the highest bid（Buy1) is $9.90 for an apple, and the lowest asking price (Sell1)is $10.00. In this instance, let's pretend you only have the basic information available to you, in stock market terms this is known as L1 data (it is the basic price data for a security including the best bid and ask price, plus the size on each side). You will be advised that the last transaction price or what is also known as the filled price is $9.91.

You look around the market and all of a sudden, you see a screen on the wall. The screen is showing the 40 buyers with the highest bids and the 40 sellers with the lowest asking prices and the screen is constantly being updated in real-time- a more in-depth look at what is actually happening in the market.

As an example of the information presented on the screen in front of you, take these 3 buy and sell levels, and the following situations described below to help illustrate the different bids for the apples.

Situation 1:

You want to buy 10 apples in a hurry, so you offer $9.91, but after waiting for a while, a deal can't be struck between you and the seller. With the quotes screen, you find that a person asking for $10 is only going to sell 1, however, there is a second (Sell2) at $10.01 and as long as you raise your price a little to $10.01, you can buy 100 immediately.

In order to buy quickly, you change your buying price to $10.01. Ding! Order filled.

Situation 2:

You want to buy 10 apples at a lower price, say $9.50, but the latest price has been changing, and you have no idea if it will drop to $9.50 in the end.

You look at the quotes screen and you see that Buy3 wants to buy 10,000 apples at the price of $9.60. In contrast, only a few hundred apples are on the selling side.

Apparently, the supplier is a bit short of demand. Having seen that there are far fewer apples, it is foreseeable that it will be difficult for the price to drop to $9.50 because as long as it reaches $9.60, all of the apples at the price will be bought by previous buyers. In order to complete the transaction as soon as possible and save costs at the same time, you may need to set the price to $9.61, and your order will be listed before that bulk order, and in turn, become more likely to be filled.

Situation 3:

You want to buy 10 apples at a price as low as possible. Without the quotes on the big screen, you only know the latest transaction price of $10.00. With it, however, you will be aware that people are trying to sell 10,000 and 20,000 apples at $10.01 and $10.02, while the buyer's price of $9.90 is part of a pool of over a hundred buyers that are willing to buy apples for close to $10.00.

Likewise, it is obvious that the supply exceeds the demand, and the price of apples will probably fall today. So you do nothing but wait, and sure enough, the price drops to $9. You buy the 100 apples at $9 each, which is a 10% savings over the original plan.

In any of these situations, you take advantage of the pending orders data, which is more commonly known as market depth, to make your trade more favourable. This imagined apple market is a simplified version of the stock market.

So, where do you get market depth data of the stock market?

Not every online broker offers market depth data. After all, it's not free. But as long as you register with Tiger Trade, you will get free Level 2 quotes, including 40 buys and sells in the market from the NYSE ArcaBook.

NYSE Archipelago Exchange: abbreviated to Arca, is the second largest electronic stock exchange in the United States (Nasdaq is the largest). For stocks listed on the NYSE, Arca accounts for about 10% of all trading volume, while for stocks listed on Nasdaq, Arca accounts for 20%, and for ETFs, Arca accounts for nearly 40%. Therefore, the orders displayed by the NYSE Arca L2 market have considerable reference value, but they do not represent the orders of the entire market. Another thing to note is that L2 market data only includes limited order data.

Compared to level 2 quotes, level 1 quotes only provide the best bid-offer-volume quote in real-time, which might be enough for novices. But it is just like the tip of an iceberg above the water, a lot of key information is hidden under the surface. If you want to grow to become an advanced investor it's important to be able to evaluate the market's supply and demand, and understanding and having access to L2 quotes is a helpful instrument.

However, there are always risks involved with investing. While the market order book contains more information for traders, traders need to exercise discretion and care when reading it because the order book/market depth can be manipulated. This could send a misleading message to the market and can make small caps more vulnerable.

Also, exchanges may allow some large orders to conceal themselves, so the market depth data can be misleading sometimes.

To summarise, L2 quotes do help, but you should also be aware of their limitations.

When you join Tiger Trade you'll have access to L2 data for US stock quotes free of charge. Sign up now and get in-depth L2 data for free and begin to master your investing.

Disclaimer:The information expressed herein is current and does not constitute an offer, recommendation or solicitation, nor does it constitute any prediction of likely future stock performance. Investment involves risk. The price of investment instruments can and do fluctuate, and any individual instrument may experience upward or downward movements, and under certain circumstances may even become valueless. Past performance is not a guarantee of future results. This advertisement has not been reviewed by the Monetary Authority of Singapore.”