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Level 3 trading is reserved for members of the National Association of Securities Dealers (NASD), which is composed of financial institutions that act as stock market broker-dealers, also known as market makers. NASD is also now known as Financial Industry Regulatory Authority (FINRA).
Level 3 Platform
Level 3 is a trading software platform for market makers. It gives these dealers access to information about competing market makers and their bid and ask prices that shape market activity.
Quotes
Stock quotes are constantly changing during a market session. A lot of websites publish delayed quotes. Level 1 and 2 platforms offer real-time quotes for investors while Level 3 offers real-time quotes plus deeper information, such as order flow.
Function
Level 3 traders own inventories of a wide range of stock. Their job is to trade as many shares as possible and profit from the spread, which is the difference between bid and ask prices. Level 3 market makers enter bid and ask quotes, and execute orders.
Benefits
Dealers benefit from Level 3 by having access to the most current and comprehensive market data available. The platform also allows them to be the conduit for market activity.
Credentials
For a firm or individual to have access to Level 3, they must gain financial industry certification and become a NASD member. Different states require different licensing for broker-dealers, but most states require at least a NASD Series 63 license.
Features
Level 3 displays on the dealer's screen the most current bids in one column and current offers in the next column. The user also has buttons and forms for entering quotes and executing trades instantly.
Source:
"Short Term Trading in the New Stock Market;" Toni Turner, July 2005
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