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I am trying to understand the definition of "Level 2 quotes" and their relationship to the "limit order book" and "market depth" ("depth of market"). I have noticed three possible competing definitions of "Level 2 quotes":

  1. "Level 2 shows the best bid and ask at each trading venue". Example:

    • Level 2 quotes in TD Ameritrade's thinkorswim trading platform:

      Level II is a thinkorswim gadget that displays best ask and bid prices for each of the exchanges making markets in stocks, options, and futures. [...]

      Microsoft Level 2 quotes from thinkorswim (2020-08-06 10am)

      Notice that each exchange is only listed once and that only the best bid and ask at each exchange is displayed.

  2. "Level 2 shows the best bid and ask from each market maker". Examples:

    • Level 2 quotes on OTC Markets:

      Fortescue Metals Group Ltd (FSUMF) Level 2 quotes from OTC Markets (at close on 2020-10-30)

      Notice that each market maker is listed only once, and that only the best bid and ask from each market maker is displayed. Contrast with (1), which is a list of exchanges/ECNs rather than a list of market makers.

    • Level 2 quotes on NASDAQ:

      Level 2 quotes from NASDAQ

  3. "Level 2 shows all bids and asks from every market maker". Example:

Specific questions:

  • When someone says "Level 2 quotes", do they mean (1), (2), or (3)? Is "Level 2 quotes" ambiguous?

  • Which one is the "limit order book"? Is it (3) ["all the bids and asks from every market maker"]?

  • Which one shows the "depth of market"? My guess would be (2) ["best bid and ask from each market maker"] and (3) ["all bids and asks from every market maker"]. It seems that "depth of market" is a loosely defined term.

I have read Difference between limit order book and level 2 quotes, but the answer there isn't really helpful besides mentioning that Level 2 has its origins in NASDAQ.

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  • In addition, there is also "Market by Order" (MBO) and "Market by Price" (MBP) views of Level 2 data.
    – Flux
    Apr 17 at 14:54
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Since no one has answered, I will provide an incomplete answer based on what I have learned since the question was asked.

When someone says "Level 2 quotes", do they mean (1), (2), or (3)? Is "Level 2 quotes" ambiguous?

According to the Nasdaq Level 2 web page:

Nasdaq Level 2 provides the top-of-file position for Nasdaq exchange participants.

According to the Nasdaq Level 2 Specification:

Level 2 will provide only the best bid and ask position for each Nasdaq market participant registered in an issue.

For the unattributed orders in the Nasdaq system, Level 2 will reflect only the top buy and sell prices under the MPID of “NSDQ”.

From this, we can conclude that conclude that "Level 2" is (2) ("Level 2 shows the best bid and ask from each market maker").


how are [Level 2 quotes] related to the limit order book and “market depth”?

Which one is the "limit order book"? Is it (3) ["all the bids and asks from every market maker"]?

Which one shows the "depth of market"? My guess would be (2) ["best bid and ask from each market maker"] and (3) ["all bids and asks from every market maker"]. It seems that "depth of market" is a loosely defined term.

I don't know. I now know what "Level 2" is, but I still don't know what (1) and (3) are. If you know more, please write an answer.

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