Level III Quote: Definition and How Levels are Used in Stocks

What Is a Level III Quote?

A level III quote is pricing information about a security provided by a trading service. It 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 the low price for the day. Level III gives institutions the ability to enter quotes, execute orders, and send information. Because the level III service offers a high level of market depth, it is restricted to registered Nasdaq market makers.

Understanding Level III Quotes

A level III quote allows a person to enter into best execution trades as prices are being updated in real-time. All publicly traded equities have a bid price and an ask price when they are bought and sold. The bid is the highest price an investor is willing to purchase a stock. The ask (offer) is the lowest price at which an investor is willing to sell a stock.

Each time a bid price or ask price is disseminated it is considered a quote. The U.S. stock market has three tiers of quotes: level I, level II, and level III. Looking at these quotes allows an investor to see how a specific stock is performing over time, as well as where the market action is consolidating.

• Level I quotes provide basic price data for a security, including the best bid and ask price + size on each side.
• Level II quotes provide more information than level I quotes by adding market depth. Level II typically shows up to the 5-10 best bid and offer prices.
• Level III quotes add greater market depth by providing up to 20 of the best bid and ask prices. Users, primarily brokers and market makers, can also input data directly.

Quote Levels

All three levels of quotes build on top of each other. Level I quotes provide investors with the highest bid and the lowest ask prices for an individual stock. This will also represent the most recent data for the particular security based on the order book in an exchange. These types of quotes are the most common and are what individual investors see when they request information from their financial services company.

Level II quotes indicate the same bid and ask information but also show the bid and ask prices for each market maker. This allows investors to identify the market maker with the lowest bid/ask spread, which is important for larger investors who conduct high volume and high-frequency trades (HFT).

Level III quotes provide all the information and services of level I and level II quotes as well as granting an investor the ability to enter or change quotes, execute orders, and send out confirmations of trades. These types of quotes are reserved for registered brokers and financial institutions. Market makers, for example, participate in level III quotes, which allows them to execute customer orders.

Level III and Reserve and Hidden Orders

Many electronic communication networks (ECNs), which are the automated systems that match buy and sell orders for securities, offer the ability for traders to post reserve orders and hidden orders. ECNs generally display the best available bid and ask quotes from multiple market participants, and they also automatically match and execute orders.

A reserve order option is composed of a price and display size along with the actual size. This order only shows the specific display size on Level III as it hides the true size of the entire order. Hidden orders, which give investors the option to hide large orders from the market on the ECN, function in a similar way but are often invisible on level III. This allows for more discretion in determining prices.

The best way for users to determine the status of the reserve or hidden orders is to check the time and sales for trades at the indicated prices.

How Quote Levels Are Used

All brokerages and financial institutions have best execution requirements on behalf of their customers. This means that they are required to provide their customers with the best stock price currently available. If a private investor, for example, wants to invest in Apple stock, they would see the level I bid and ask prices listed on their broker's online trading portal.

When the customer initiates an order to purchase the stock, the broker uses level III quotes to give that investor the best possible price. So the deeper information contained in level III quotes is used to the benefit of the investor, even though they are only seeing level I quotes.