A Level III quote provides detailed pricing information about a security from a trading service. It covers the real-time bid price, ask price, quote size, last trade price, trade size, and the high and low prices of the day. Institutions use Level III quotes to enter quotes, execute orders, and convey trade information. This advanced market data is limited to registered Nasdaq market makers and is inaccessible to individual investors.
Key Takeaways
- The U.S. stock market operates with three tiers of quotes: Level I, Level II, and Level III.
- A Level III quote includes real-time bid and ask prices, last trade details, high and low prices, as well as quote sizes.
- Institutions leverage Level III for executing orders and sending market data, providing a higher market depth.
Quote Levels: Exploring Each Tier
Publicly traded equities have a bid and ask price when transacted. The bid price is the highest amount an investor is ready to pay for a stock, whereas the ask price, or offer, is the lowest amount a seller agrees to accept. Each price dissemination is termed as a quote.
The three tiers in the U.S. stock market are:
- Level I: Basic price data such as the best bid and ask prices with sizes on each side.
- Level II: More detailed than Level I, showing 5-10 best bid and offer prices, providing a view into market depth.
- Level III: Further extends market depth, presenting up to 20 best bid and ask prices, with data entry capabilities restricted to brokers and market makers.
Nasdaq market makers are member firms engaged in trading securities at prices shown in Nasdaq for principal trades and customer accounts.
Unraveling Quote Differences
Building on each other, the three quote levels bring increasing layers of information.
- Level I Quotes: Show highest bid and lowest ask prices based on the most recent order book data. These quotes are typical for individual investors accessing financial data.
- Level II Quotes: Show additional market depth, listing bid and ask prices for each market maker. Crucial for investors undertaking high-volume and high-frequency trades.
- Level III Quotes: Include comprehensive Level I and II details while allowing modification of quotes, order execution, and trade confirmations. Reserved for brokers and financial institutions to facilitate customer order execution.
Hidden Orders and ECNs
Electronic Communication Networks (ECNs) match buy and sell orders systematically, allowing the posting of reserve and hidden orders. ECNs display the best available quotes and auto-match orders. A reserve order shows a price and display size along with the actual size, presenting only the specified display size in Level III as the true full size is concealed. Hidden orders operate similarly, often invisible on Level III for greater discretion.
Institutional Access to Level III Quotes
Level III data is accessible only to institutions and registered Nasdaq market makers. These entities utilize this data for entering quotes, executing orders, and sharing trade-related information. Individual investors or traders do not have direct access to these quotes.
Usage of Quote Levels
All brokerages and financial institutions are bound by ‘best execution’ requirements, ensuring customers receive the top stock price available. For example, an investor seeking to purchase Apple stock would observe Level I bid and ask prices. When placing an order, the broker relies on Level III quotes to secure the best price for the customer. While investors view Level I data, the in-depth Level III information benefits them indirectly.
Decoding Large Block Trades
Institutional investors handle block trades, which involve large share volumes. Level III quotes deliver detailed market information essential for the execution of these voluminous trades.
Conclusion
The U.S. stock market features three quote tiers: Level I, Level II, and Level III. A Level III quote provides exhaustive pricing information for stocks, including real-time bid and ask prices, last trade details, and more. Although inaccessible to individual investors, these quotes play a crucial role for institutions in fulfilling best execution requirements.
Related Terms: Level I Quotes, Level II Quotes, Bid Price, Ask Price, Market Depth, Market Making, High Frequency Trading.
