Here is a simple reason why Level 2 is important:
Bid Side:
NITE .012
ETMM .011
ABLE .010
Ask Side:
NITE .013
ETMM .014
ABLE .015
Here is what I know: There is a NITE buyer willing to buy some number of shares. It might be a person or a MM. I don't know how many shares they want to buy. I know other NITE buyers willing to buy between .011 and .012 but I am not able to find out until someone sells to NITE on the bid and NITE downticks. I know that there is an ETMM buyer at .011 and possibly more below it, but you wouldn't know this with only L1 quotes. I know there is an ABLE buyer at .010, but you wouldn't know this with L1 quotes. I also don't know how much the ETMM or ABLE MM or person are willing to buy.
On the ask side, I know that NITE is willing to sell me shares at .013, I don't know if NITE has an inventory, is shorting, or if it is a person selling through NITE. I know there might be other NITE sellers between .013 and .014. I know that ETMM is willing to sell at .014 but no lower, it might be a person or MM...same with ABLE.
So lets say the stock is thinly traded and I buy on the ask at .013 and NITE fills my complete order and moves up. Most likely NITE shorted me the shares and is willing to let the stock run. If NITE had inventory it would fill my whole order and remain on the ask, this could be NITE's inventory or a person's inventory.
But what if I take out the ask and NITE downticks...possible short and cover and I don't want to play anymore, or a seller trying to get out. Eitherway I'm not hitting the ask and I'm going to move and sit bid.
Also the MM on the ask or bid can tell you a lot about the stock. Is the MM known for dilution? or a big buyer, is the MM the ax, does the MM trade the stock abusively?
