Level Three is a NASDAQ workstation service that allows market making firms to see the inside market, the quotes entered by all market makers, execute orders and enter their own quotes for the security. This is the highest level of NASDAQ service.
Applying "Level Three" to Securities Exams:
Level Three allow broker dealers who are approved as market makers to enter bids and offers for the securities in which they make markets. Level three allows market maker’s to enter priced quotes for securities directly into the NASDAQ market center. Other market makers, order entry firms and ECNs may execute orders against the market maker’s quotes.