MLG X; AFTER ENTERING HOLDING AT FARMM INTERSECTION AT 10000'; SAW MLG Y ALSO IN HOLDING APPROX 300' ABOVE AND 2 PT 5 MILES AWAY. ARTCC INSTRUCTED MLG Y TO RETURN TO 11000'.

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I HAD JUST ENTERED HOLDING AT 10000' MSL AND HAD TURNED OUTBND. F/O RPTED ENTERING HOLD TO CENTER. WE WERE LOW AND OUT OF THE TOPS OF THE OVCST. WHILE STILL IN THE TURN; WE CAME OUT OF THE CLOUDS JUST LONG ENOUGH TO SEE ANOTHER ACFT AHEAD 2-3 MI AND ONLY SLIGHTLY HIGHER THAN OUR ALT. THE F/O CALLED THE CENTER CTLR AND ASKED ABOUT THE TFC AT 12 O'CLOCK. AFTER SEVERAL RADIO CALLS BTWN THE CENTER AND THE OTHER ACFT; IT WAS CLR THAT HE HAD BEEN ISSUED CLRNC TO 11000'; READ BACK 10000'; AND THE BUSY CTLR MISSED THE READ BACK ERROR. THE OTHER ACFT WAS NO LOWER THAN 10300' WHEN HE BEGAN HIS CLB BACK TO 11000'. SHORTLY AFTER; WE CHANGED TO APCH CTL FREQ W/O FURTHER PROB. SUPPLEMENTAL INFO FROM ACN 86258: WE ENTERED HOLDING AT FARMM (CAPT FLYING); 10000' MSL OUTBND. WE WERE IN AND OUT OF THE TOPS OF THE OVCST. THE CAPT SAW ANOTHER MLG SLIGHTLY HIGHER AND DSNDING ABOUT 2-3 MI AHEAD. I CALLED CENTER AND ASKED ABOUT THE TFC AT 12 O'CLOCK. AFTER SEVERAL RADIO CALLS IT BECAME APPARENT THEY WERE SUPPOSED TO BE AT 11000' MSL. THEY INSISTED THEY READ BACK 10000' MSL. WHO MISSED WHAT RADIO CALL IS ANYBODY'S GUESS. THEY WERE NEVER CLOSER THAN 300' AND 2 MI. SUPPLEMENTAL INFO FROM ACN 85911: FLYING TO FARMM INTXN FROM THE NW; WE UNDERSTOOD ATC CLRED US FROM 13000 TO 10000'. WE READ BACK LEVELING 13000' FOR 11000'. WE WERE CLRED TO FARMM INTXN TO HOLD. DSNDING IN THE HOLDING PATTERN; ATC ASKED OUR ALT. I READ BACK LEVELING 10400' FOR 10000'. SHE SAID WE WERE CLRED TO 10000'. WE IMMEDIATELY CLBED BACK TO 11000'. THERE WERE NO OTHER INCIDENTS. THE CTLR WAS BUSY AND WE (CTLRS AND CREWS) NEED TO BE MORE ALERT FOR INSTRUCTIONS AND REPLIES TO INSTRUCTIONS.