What exactly are Level 2 quotes, and how are they related to the limit order book and "market depth"?

Question

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. [...]

     

     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:

     

     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:

     

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

   • NASDAQ Bookviewer with TotalView Data:

     

     Notice that every order from every market maker is shown. Contrast with (2), where only the best bid and ask from each market maker is shown.

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.

Answer 1

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").

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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.