#1 is 6 O'Clock hold, #2 is Center Hold and #3 is Driving-the-Dots. I find that most of my stock guns will shoot to the center of the target at self defense distances (3-15 yards) when using #2.
That's the first time I've heard that name for using the dots. Most of the time people call it the "Modern Combat Sight picture".
I'm tempted to say that #3, whatever it's called, is wrong. There are a few problems with it. First, the overwhelming majority of M&P shooters find that the center hold (#2) is right for their gun. That's how my M&Ps shoot when using a rest. Second, lining up the dots is very difficult. All the dots are the same
physical size therefore, the front sight
appears smaller because it's further away. This leads to the question of how do you line them up? Third, using #3 requires the shooter to cover the target. This makes it difficult to aim properly. Fourth, those that say S&W says that #3 is how the M&Ps are set up at the factory cannot produce a reference to prove it. In fact, S&W does not say anything about how to use the sights in the manual. Fifth, not all sights with dots are drilled the same, but all are the same if you line up the tops.
Now, the reason I'm only tempted to say #3 is wrong is because there is at least one sight company that states #3 is the way their sights are supposed to be used. I can't remember the name of that company. Shame on me.
So, I will finish this with what I usually say about shooting anything; use the sight picture that works for you. If you're shooting low and using #1, a change to #2 or even #3 is logical. Always test your gun for accuracy from at least a rest. Use a vice if you can.