The ability for traders to see the full depth of the order book on an exchange not only proffers greater insight and transparency on the supply and demand of individual stocks, it allows them to enhance their trading strategies, not to mention providing the ability to improve liquidity management.
Ordinarily, people think of Level 2 price data as the best way to ascertain the depth of the market. Level 1 simply shows the live best bid and offer on a company’s shares.
But it is a misnomer to suggest that anything over and above the current displayed BBO is Level 2. “It is a generic term. People think they are getting a full view of the market with Level 2 but they’re not. In Nasdaq terminology, Level 2 only provides the top price level for each and every market participant in the Nasdaq execution system, whereas Nasdaq TotalView® offers full depth – so it’s almost like Level 3,” says Brandon Tepper (pictured), Head of Americas Sales, Nasdaq Global Information Services.
Over thirty years ago, Nasdaq introduced Nasdaq Level 2 to provide the top-of-file position for Nasdaq exchange participants. Whilst this is still valuable in terms of helping participants track their quotation positions and comply with SEC and Nasdaq marketplace rules, Nasdaq TotalView® goes much further. It offers the full depth of the market at every price level in NASDAQ-, NYSE-, NYSE MKT- and regional-listed securities on Nasdaq® and displays quotes and orders not visible in the legacy Level 2 solution.
In fact, TotalView displays more than 18 times the liquidity of Level 2 data.
“Level 2 is a legacy term – we want to raise people’s awareness that they can get better data using Nasdaq TotalView,” emphasises Tepper.
Because of this enhanced granular view of the market, the bid/offer data contained within TotalView gives investors and traders a more powerful tool for managing their P&L. Users can follow pockets of liquidity over time, develop or refine their trading strategies, identify potential trade opportunities as well as analyse order patterns and levels of momentum throughout the market.
“TotalView has been around since 2003. It is Nasdaq’s premium equity data product. However many levels of price data are coming in to Nasdaq from market participants, that’s exactly what users see. Basically it’s a product that gives the most complete look available into the Nasdaq trading system,” says Todd Borneman, product manager at Nasdaq.
One of the key functions within TotalView is the Net Order Imbalance Indicator (NOII). Think of it as a supply/demand indicator. The NOII provides imbalance information on a specific stock during Nasdaq’s auctions at Market Open and Market Close. “The auction starts two minutes before the markets open in the morning and 10 minutes before the markets close in the afternoon,” confirms Thomas Maguire, product manager at Nasdaq.
“With respect to the Market Open and Market Close auction, we are able to show, in near real time, what the interest is in a specific security. The NOII shows you indicative prices of where the cross is, but it also shows the depth of interest on either side,” says Maguire.
There might be a significant imbalance on the buy or sell side for a particular stock, particularly during earnings announcement periods. As such, NOII helps to educate the user as to where the price of that security might be at Market Open the following morning, if they make an earnings announcement after the markets have closed.
Having that information at one’s fingertips could potentially enhance someone’s ability to gauge sentiment and interest in a specific security by the market as a whole. If the NOII is showing that there’s more of an imbalance on the buy side than there’s heavy buying interest; this could indicate that a company’s earnings announcement the following morning, for example, will be positive and present a buying opportunity. The opposite is also true if there is clear selling interest.
“It is information that Nasdaq has that is not published by any other exchanges. Reg NMS and SEC requirements stipulate that you have to publish the top price (or best price, which is the Level 1 information). The depth of market and NOII information that users have access to is completely proprietary to Nasdaq,” says Borneman.
There are different ways one can analyse the data. Not just the day of the earnings announcement, but the day after, or the days leading up to the announcement, to get an idea of how bid and offer volumes might increase, and what the market is anticipating, in respect to a company’s earnings announcement.
Take Apple earlier this year, for instance. For its fiscal 2016 first quarter, ended 26th December 2015, the tech giant announced a record quarterly profit of USD18.4 billion. Leading up to that announcement, the NOII would have revealed to TotalView users how the markets were anticipating that announcement.
During auctions, if traders or investors using TotalView have sizeable trade volumes to execute, it’s a great opportunity for them to make use of the buy and sell demand in the auction, and offset that demand. If they see 20,000 shares of a specific stock to buy in the auction that they were looking to offload, that is a perfect opportunity for them to enter a sell order into the auction and offset the buy imbalance being shown by the NOII.
“They will know with certainty that those orders will get filled because the NOII information is showing them an imbalance. It gives them certainty of liquidity. They’re not just going blind into the market hoping to sell 20,000 shares of a security, which would 1) affect the stock price and 2) not give any confirmation that there would be buyers in the market for that security.
“Portfolio managers that have orders to take care of know they can get them filled in our auction because we are giving them information during that auction that says where the imbalance is,” confirms Tepper.
Earnings season tends to produce volatility in the market as participants react positively or negatively to company announcements. By getting an idea as to how the markets will open or close, Nasdaq’s solution effectively helps users to anticipate potential volatility and position themselves accordingly.
“When there’s an earnings surprise after Market Close the auction next morning is intended to take the surprise out of where that security will start trading by showing you what market sentiment is leading up to Market Open,” adds Maguire.
Whether you are a hedge fund, a broker/dealer, even a retail investor, with TotalView the fact that you can see the available prices at the available size levels means that you know you can effectively execute an order based on actual supply and demand.
More information, in this context, really does equate to more effective decision making.
“I think the overriding message is that TotalView gives users additional information. Information creates knowledge and that’s what people use to make decisions about trading. It gives people increased visibility and information on order flow and trading in the marketplace,” states Borneman.
One could look at earnings announcements on stocks over multiple cycles and see how their stock price has performed based on whether they exceeded or missed their earnings targets for one quarter versus another. How did the NOII imbalance differ between quarters over 1-, 2- or 5-year time series?
In effect, building a picture over time with the full visibility of TotalView can help users to analyse patterns in historic stock prices and figure out how that might play out in the future.