What Is a Level III Quote?
Let me explain what a Level III quote is. It's pricing information about a security that a trading service provides. This includes the real-time bid price, ask price, quote size, price of the last trade, size of the last trade, high price for the day, and low price for the day.
With Level III, institutions can enter quotes, execute orders, and send information. Since it offers such a high level of market depth, it's restricted to registered Nasdaq market makers. You won't find Level III quotes available to individual investors or traders.
Key Takeaways
You should know that the U.S. stock market operates with three tiers of quotes: Level I, Level II, and Level III. A Level III quote gives you the real-time bid price, ask price, quote size, price of the last trade, size of the last trade, high price for the day, and low price for the day. On top of that, Level III lets institutions enter quotes, execute orders, and send information.
Quote Levels
All publicly traded equities come with a bid price and an ask price when they're bought and sold. The bid is the highest price an investor is willing to pay for a stock, and the ask is the lowest price at which an investor is willing to sell it. Every time a bid or ask price is disseminated, it's considered a quote.
In the U.S. stock market, there are three tiers: Level I, Level II, and Level III. These quotes help you see how a specific stock performs over time and where the market action is consolidating.
Level I quotes provide basic price data for a stock, including the best bid and ask price plus size on each side. Level II quotes add more information by showing market depth, typically up to the 5-10 best bid and offer prices. Level III quotes go further by providing up to 20 of the best bid and ask prices, and users—primarily brokers and market makers—can input data directly.
Important Note on Market Makers
A market maker is a Nasdaq member firm that buys and sells securities at prices it displays in Nasdaq for principal trades and customer accounts.
Quote Differences
All three levels of quotes build on each other. Level I quotes give you the highest bid and the lowest ask prices for an individual stock, representing the most recent data based on the order book in an exchange. These are the most common quotes, and they're what you see as an individual investor when requesting information from your financial services company.
Level II quotes show the same bid and ask information but also include the bid and ask prices for each market maker. This lets you identify the market maker with the lowest bid/ask spread, which matters for larger investors doing high-volume and high-frequency trades.
Level III quotes provide all the information and services of Level I and II, plus they allow you to enter or change quotes, execute orders, and send out trade confirmations. These are reserved for registered brokers and financial institutions. Market makers use Level III to execute customer orders.
Reserve and Hidden Orders
Electronic communication networks, or ECNs, are automated systems that match buy and sell orders and let traders post reserve orders and hidden orders. ECNs display the best available quotes from multiple market participants and automatically match and execute orders.
A reserve order shows a price and display size but hides the actual size. On Level III, it only shows the specific display size, concealing the true size of the entire order. Hidden orders work similarly, giving you the option to hide large orders from the market on the ECN; they're often invisible on Level III, allowing more discretion in pricing.
Do Traders Have Access to Level III Quotes?
Level III quotes are used by institutions and registered Nasdaq market makers to enter quotes, execute orders, and send trade-related information. They're not available to individual investors or traders; instead, they're reserved for those executing customer orders.
How Are Quote Levels Used?
All brokerages and financial institutions must meet best execution requirements for customers, providing the best stock price available. If you want to invest in something like Apple stock, you'd see the Level I bid and ask prices on your broker's online portal. When you place the order, the broker uses Level III quotes to get you the best price. The deeper info in Level III benefits you, even if you only see Level I.
What Are Large Block Trades?
Institutional investors handle block trades, which involve large volumes of shares being bought or sold. Level III quotes give these traders detailed market information to execute these transactions efficiently.
The Bottom Line
To wrap this up, the U.S. stock market has three tiers of quotes: Level I, Level II, and Level III. A Level III quote is pricing information about a stock from a trading service, including real-time bid and ask prices, quote size, last trade details, and daily highs and lows. Remember, Level III quotes aren't available to individual investors or traders.
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