Market data is the trading information (e.g. the most recently traded price) that is provided for each market by the exchange that offers the market (e.g. the market data for the JPY futures market (the US Dollar to Japanese Yen futures market) is provided by the CME Group). Market data is used by traders to watch their markets and make their trades via their trading software (e.g. Interactive Broker's Trader Workstation software, etc.) and their charting software (e.g. Sierra Chart, etc.).
Traders subscribe to the market data for their markets via their brokerage, and will choose their market data subscriptions based upon the markets that they are going to be trading (e.g. a traders that wants to trade individual stocks will need a market data subscription that includes the individual stocks that they want to trade, whereas a trader that only wants to trade currency markets (e.g. forex market) will not need any market data subscriptions that include any individual stocks).
Level I and Level II Market Data
Market data is usually available is two different subscriptions (depending upon the markets in question), namely level I markets data and level II market data.
Level I market data includes all of the standard trading information for a market, which is the following:
- the bid price - the highest currently available buy order,
- the bid size - the number of contracts (or shares, etc.) that are available at the bid price,
- the ask price - the lowest currently available sell order,
- the ask size - the number of contracts (or shares, etc.) that are available at the ask price,
- the last price - the most recently traded price,
- the last size - the most recently traded number of contracts (or shares, etc.).
Level II market data includes all of the standard trading information for a market (i.e. the level I market data), and some additional trading information, which is the following:
- the bid order book - the five to ten highest currently available buy orders,
- the bid order book size - the number of contracts (or shares, etc.) that are available at each price within the bid order book,
- the ask order book - the five to ten lowest currently available sell orders,
- the ask order book size - the number of contracts (or shares, etc.) that are available at each price within the ask order book.
Level I market data provides all of the trading information that is required to display a graphical chart of a market, and the time and sales of a market. Level II market data provides the additional trading information that is required to display the order book for a market (which is also known as a depth of market display).
Level I or Level II Market Data?
Many new traders do not know which level of market data they will need (which is understandable as they are new traders, but if they had received a proper trading education they would know which level of market data they needed), and therefore subscribe to all of the possible market data (i.e. level II market data).
Most traders (including professional traders) only require level I market data because level I market data provides all of the trading information that is needed to display the graphical charts that they will use to perform their analysis, and all of the trading information that is needed to make trades. Level II market data might be required for some trading techniques or trading systems, but individual traders are very unlikely to be using such trading techniques or systems (or rather, they are unlikely to be using them successfully), and therefore individual traders only need to subscribe to level I market data.
Market Data Psychology
It might seem surprising that there is any psychology involved in choosing the appropriate level of market data, but it is true that there is a psychological effect depending upon which level of market data is chosen.
Many new traders believe that they should have all of the possible information about their markets, and that if they do not have all of the possible information, then they are less likely to be successful. The result is that they feel compelled to subscribe to level II market data, and even worse, they feel compelled to use level II market data, even though they don't need to do so. Many traders that subscribe to level II market data do not know why they are doing so, but they know that they want to, and they therefore become dependent upon the level II market data, and try to find a way to use the additional trading information in their trading, even if by doing so they are trading incorrectly.
The Correct Way to Choose Market Data
If you are a new trader, then you only need level I market data. If you are a professional trader, you most likely only need level I market data (and if you didn't know that already, then you are not actually a professional trader). If you are a new or experienced trader that uses level II market data, but you do not know why, then you only need level I market data. If you are a professional trader that uses level II market data, and you can explain exactly why and how you do so, then perhaps you do need level II market data.
