Let's look at a few things here, to clarify what exactly we are looking at.

Symbol:  POLR
Current Spread:  50 bid x 50 1/8 Ask.  The top Bid/Ask in Yellow is what you would see if looking at a regular level 1 quote.  This is also called the INSIDE QUOTE.
Size:  The size is the number of shares available by a certain Market Maker at a certain price.  In this screen, MASH is looking to buy 300 shares at $50 a share and GSCO is looking to sell 1000 shares at 50 1/8.  These are knows as the Bid and Ask sizes.  In a regular quote service, you would just see the Bid/Ask sizes listed as 3 x 10.

Short Term Trend Indicators

Using Level 2 is a great way to determine short term stock trends.  For example, if you are looking to buy a stock for a LONG position, and you want to get in at the best possible price, use Level 2.  The image above is a great example of a stock that is stronger on the Ask, meaning it looking like it could fall back a little for you to buy your stock.  Looking at the Ask, you can see that there are 4 Market Makers at 50 1/8, with a total of 7500 shares available to be bought.  Also, at 50 1/4, the next price up on the Ask, there are 6 MM's with a total of 9600 shares available to be bought.  Looking at the Bid, there are only 2 MM's at 50 with 2000 shares available, the next MM in line is at 49 15/16 with 1000 shares, then there are 2 at the next bid with 2000 shares.  Looking at this tells you that with any selling, the stock is going to downtick a lot faster than it will with buying.  The short term Level 2 indicates a downward bias, so you should not buy at this point, and wait until the Bid gets stronger with more Market Makers at each level.

Now lets say the trend was reversed, and there were many more MM's sitting on the Bid then the Ask.   For example, say there were 4MM's at 50, 5MM's at 49 15/16, and 3MM's at 49 7/8  on the Bid.  On the Ask lets imagine there were 2 MM's at 50 1/8, 1MM at 50 3/16, 2MM's at 50 1/4, 2MM's at 50 3/8 and 3MM's at 50 1/2.  This would indicate a much stronger Bid side and that the stock will move up a lot faster on buying than it will down on selling in the short term.  Seeing this, I would be more apt to BUY a stock if I was taking a long position.

Upticks/Downticks/Holding/Selling

Level 2 is great to tell when a stock is going to either downtick or uptick, either the bid/ask.  For example, let's say for stock KCAP the current market price is $3 x $3.06.  Stock currently has a very strong Bid, with the following Market Maker Lineup:  NOTE:  MM1 on Ask does not Equal MM1 on bid....just for visual purposes.
BID:                    ASK:
MM1    3            MM1    3.06
MM2    3            MM2    3.06
MM3    3            MM3    3.09
MM4    3            MM4    3.125
MM5    2.93       MM5    3.188
MM6    2.93       MM6    3.25
MM7    2.90       MM7    3.25
MM8    2.87       MM8    3.37

Now lets say you are holding the stock for a trade, and you know it looks solid by looking at Level 2, so you decide to hold it due to the strong Bid.  Also, any buying in the above scenario will uptick the stock, as market makers drop off the ask when they fill buys.  Stock will go up fairly fast on buying here.  If you did not have level 2, you would only see $3 x $3.06.  10 minutes later, the volume picks up a little, and the MM's are in the following lineup:
BID:                    ASK:
MM1    3            MM1    3.06
MM2    2.93       MM2    3.06
MM3    2.90       MM3    3.06
MM4    2.87       MM4    3.06
MM5    2.80       MM5    3.09
MM6    2.80       MM6    3.09
MM7    2.75       MM7    3.125
MM8    2.63       MM8    3.188

Your regular quotes would still show a price of $3 x $3.06, so without level 2 you would probably still hold.  With Level 2, you can see that the Bid has weakened substantially, and any real selling will drop well below 3, and the Ask is now stacked with MM's so it will be hard to move it up.  Seeing this, you should probably sell if you are in it for a trade, and hopefully beat the other sellers out.  This is a very weak Level 2 with only 1MM at each subsequent Bid, this stock will fall pretty fast on selling, unlike in the first scenario.  Once again, without Level 2, you will probably be caught in a downturn and be too slow to sell at the price you want.

Predicting A Short Term Run/Fall

I will try to show how through Level 2, you can predict how a stock will react to incoming volume, even if there is a pause in the current trading activity.  The following is the MM Lineup for KCAP again at a different point in time:
BID:                    ASK:
MM1    3            MM2    3.06
MM2    3            MM4    3.06
MM3    3            MM5    3.06
MM4    3            MM7    3.09
MM5    2.93       MM6    3.09
MM6    2.93       MM1    3.125
MM7    2.90       MM3    3.188
MM8    2.87       MM5    3.25

The stock looks to be pretty stable here at $3 x $3.06.  Volume has slowed down and we are in a lull.  As you know from earlier, the $3 x $3.06 is known as the INSIDE SPREAD because it represents the High Bid/Low Ask.  Now lets examine the MM lineup a few minutes later as several market makers are changing their bids/asks while the inside bid remains the same.  In this example, MM1 on the Ask is the same MM1 as in the Bid.  Downticks are shown in Red.
BID:                    ASK:
MM1    3            MM2    3.06
MM2    3            MM4    3.06
MM5    2.93       MM5    3.06
MM7    2.90       MM7   3.06
MM3    2.875     MM6    3.09
MM4    2.875     MM1    3.125
MM6    2.81       MM3    3.125
MM8    2.81       MM5    3.188

In this example, the Inside Spread remains the same, while there are several downticks from market makers that you cannot see.  This shows that a stock may be weakening, and if you are looking to buy, you may want to wait, and if you are looking to sell, you may want to place your order.  The opposite is also true if there are several upticks with underlying Market Makers, if that occurs you may want to buy or hold off your sell order.  This again is something that you can only see with Level 2 quotes.

Level 2 is crucial when trading BB stocks, and small Caps that may be more volatile.  It is also important when Day Trading, because it gives you the best indication as to when to buy/sell at the best points.  Trying to Trade without Level 2 is basically like driving with one eye closed.  While you CAN do it, it is a lot easier and less risky to use Level 2.  You can make rash decisions without Level 2, as you cannot fully see what is going on. The following examples are rash decisions one may make without access to Level 2.

Possible Rash Decisions

The following is a Level 2 lineup for a thinly traded stock that you are in for a day trade.  Current price on BNEZ is .32 x .35.

BID:                    ASK:
MM1    .32         MM1    .35
MM2    .32         MM2    .36
MM3    .30         MM3    .38
MM4    .26         MM4    .38
MM5    .24         MM5    .42

One rash decision people make is selling too early when they think a stock is falling.  Some people on message boards will post that MM's are manipulating a stock by Dropping the price on buying.  For example, people are buying BNEZ at .35, buying slows, and the current price falls to .32 x .33 from .32 x .35.  People start yelling about how it is falling, as the MM's are walking it down.  This may be a ploy by MM's to cause selling, but we do not really know.  people may sell now thinking it is falling which may be a poor decision if you do not see the full Level 2 picture.  The following is the new Level 2:
BID:                    ASK:
MM1    .32         MM2    .33
MM2    .32         MM3    .38
MM3    .32         MM4    .38
MM4    .31         MM1    .40
MM5    .30         MM5    .44

All that really happened was that MM2 lowered his Ask to .33 from .36, maybe he has an inventory that he needs to sell so he wants some buyers to take his shares.  MM1 who was on the Ask, just upped the price to .40, so the reason it fell was another MM stepped in with a lower price.  Also, the Bid got stronger so it would be foolish to sell at this point seeing this, but without access once again, you only see a drop in the Ask which may cause a panic sell.

MM movements can also cause poor buying decisions.  For example, lets use the following info on DGIV to illustrate this.  Assume this is a fairly thinly traded stock.  You think a stock may be running and you don't want to miss out on profits.  Current price is $1 x $1.06.  Level 2 is as follows:
BID:                    ASK:
MM1    1.00       MM1    1.06
MM2    .87         MM2    1.25
MM3    .87         MM3    1.25
MM4    .80         MM4    1.25
MM5    .75         MM5    1.375

You want to buy thinking it will run.  You see the price change to $1 x $1.25 and the you jump in now because the price is going up.  This may be a poor decision without seeing Level 2 Information.  The new Level 2 is as follows:
BID:                    ASK:
MM1    1.00       MM2    1.25
MM2    .87         MM3    1.25
MM3    .87         MM4    1.25
MM4    .80         MM5    1.375
MM5    .75         MM1    1.50