To really take bitcoin exchange to the next level, we need to ensure that buyers and sellers are getting the best price. This is accomplished every day in the financial markets using consolidated level II, and the National Best Bid and Offer (NBBO)
How it works:
- Customers can have an account at any brokerage firm (Ameritrade, Schwab, E-trade, etc).
- Brokerage firm is obligated to ensure the order has the funding in place to back it up.
- Brokerage firm is obligated to fill the order at the best possible price, on any exchange.
- Exchanges accept orders from each other and settle up the net difference each night.
Now this is a good thing. It means if I want to buy 1000 shares of AAPL, I can enter an order with my broker, and they split up the order and route it to get me the best prices. I don’t have to look around.
This requires a consolidated Level II Market Depth of all exchanges to be merged into one table. Here's an example I recently grabbed of AAPL on my Ameritrade platform:
The MPID is the Exchange where this order is sitting. So this table consolidates the open orders near-the-money from Nasdaq, ArcaX, and other exchanges.
The NBBO is the highest bid price and the lowest offer price on any exchange. This is called the Level I, and only contains the highest bid (and order size at that bid) and the lowest offer (and order size at that offer). Using the Example above, the Level I for AAPL, which is the NBBO, would be
Bid – 391.01
Ask – 391.13
Bid Size - 100
Ask Size- 1100
This is the Level I quotes that are used for a general snapshot of a stock.
Also, there is a Level III, which shows all the details about each individual order. But no one really uses that except the exchanges themselves.
What bitcoin needs is a consolidated Level II like this chart above, to pull in the market depth from all the exchanges. Once you get that in place, exchanges need to automatically route an order (and split it if necessary) to the proper exchange for execution. Exchanges would need to trust orders coming from each other.
This will ultimately benefit the exchanges and everyone who uses them, by bringing tighter spreads and more volume.