What is level 3?
Level 3 is the highest level of quotes provided by a trading service and gives the institution the ability to enter quotes, execute orders and send information. Level 3 service is limited to member companies of the National Association of Securities Dealers (NASD) that operate as registered market makers.
Understanding level 3
A level 3 quote allows a person to perform best execution transactions when prices are updated in real time. Level 3 and its associated quotations are closely linked to stock market operations. All publicly traded stocks have a bid price and a ask price when they are bought and sold. The offer is the highest price that an investor is willing to buy a stock. Demand is the lowest price at which an investor is willing to sell a stock.
Whenever a bid or ask price is published, it is considered a quote. The American stock market has three levels of quotes: level 1, level 2 and level 3. The consultation of these quotes allows an investor to see how a specific action behaves over time as well as where the market action consolidates .
Examples of level 3 quotes
The three levels of quotes overlap. Level 1 quotes offer investors the highest offer and the lowest selling price for an individual stock. These types of quotes are the most common and this is what private investors see when they request information from their financial services company.
Level 2 quotes provide the same supply and demand information, but also display supply and demand prices for each individual market maker. This allows investors to identify the market maker with the lowest bid / ask spread, which is important for large investors who trade at high volume and high frequency.
Level 3 quotes provide all the information and services for Level 1 and Level 2 quotes. In addition, Level 3 quotes also allow an investor to enter or change quotes, execute orders and send transaction confirmations. These types of quotes are reserved for registered brokers and financial institutions. Market makers, for example, participate in level 3 quotes, which allows them to execute customer orders.
How Quote Levels Interact
All brokerages and financial institutions have best execution requirements on behalf of their clients. This means that they are required to provide their clients with the best stock price currently available. If a private investor, for example, wants to invest in Apple stocks, they will see the level 1 offer and ask for the prices indicated on their broker’s online trading portal. When the investor initiates a stock purchase order, the broker uses level 3 quotes to give him the best possible price. Thus, the more in-depth information contained in the level 3 quotes is used for the benefit of the investor even if he only sees the level 1 quotes.