What Is a Level 3 Trading Account?
Stock market day traders often make profits on very small price movements in the stocks they trade. They require the most accurate market data available to predict the movement of prices. The NASDAQ quotation system provides traders with more in-depth pricing information with their Level 2 and Level 3 price data.
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Identification
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The different levels of stock quotes that Nasdaq provides can be indicated with either Arabic numerals or Roman numerals. So you can see the levels as Level 1, 2 or 3 or Level I, II or III. The Nasdaq system provides quotes for NYSE, AMEX and regional stock exchanges as well as for the stocks listed on the Nasdaq exchange.
Function
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Level 1 prices are the best bid and ask prices currently on the system. These have the highest bid price and lowest ask price for each stock or security. Level 1 pricing is what an investor sees for "real time" stock pricing and on the order screen of a regular brokerage account, according to Investopedia. Level 2 pricing shows an expanded list of the bid and ask prices. The level 2 pricing includes the size of the bid or ask and who it is from. Level 3 pricing is for registered market makers who can actually put bid and ask quotes into the electronic trading system.
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Significance
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Level 3 quoting and trading gives the most in-depth real time view of stock pricing and allows the fastest order entry and trading. Level 3 traders are the ones that set the prices in the electronic trading systems with their adjustments of current bid and ask quotes.
Potential
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Level 3 trading is restricted to FINRA--Financial Industry Regulatory Authority--registered firms. Level 3 trading is used by market makers in individual stocks and by the trading desks of stock brokers. The level 3 trading system is not available to individual investors trading for their own accounts.
Considerations
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Level 2 quotes provide the same depth of pricing information as the Level 3 system, notes Investopedia. Individual traders can purchase a Level 2 quote package from numerous vendors. Some online brokerage firms provide Level 2 pricing for free to traders that have a certain level of activity and commissions. Nasdaq has surpassed the data of Level 2 pricing with its Nasdaq TotalView data package.
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References
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