What Is the National Best Bid and Offer (NBBO)?
The National Best Bid and Offer (NBBO) is a quote that reports the highest bid price and lowest ask (offered) price in a security, sourced from among all available exchanges or trading venues. The NBBO, therefore, represents the tightest composite bid-ask spread in a security.
The Securities Exchange Commission's (SEC) regulation NMS requires brokers to trade at the best available ask and bid price when buying and selling securities for customers and that brokers guarantee at least the NBBO quoted price to its customers at the time of a trade.
- The NBBO shows the best available (lowest) ask price and best available (highest) bid price available to customers from multiple exchanges.
- The SEC mandates brokers fills to customers of at least the NBBO per Regulation NMS.
- It is calculated and disseminated by CQS and UTP Quotation Data Feed.
- While it ensures that all investors receive the best possible prices when executing trades, NBBO may not always reflect the most up-to-date data, resulting in trades that may not match investor price expectations.
Understanding the National Best Bid and Offer
The NBBO is calculated and disseminated by Security Information Processors (SIP) as part of the National Market System Plan (NMSP), which is used to process security prices. There are two SIPs responsible for this task. The Consolidated Quotation System gives the NBBO for securities listed on the New York Stock Exchange, NY-ARCA, and NY-MKT, whereas the Unlisted Trading Privileges Quote Data Feed gives the NBBO for securities listed on the NASDAQ.
The NBBO updates throughout the day with the highest and lowest offers for a security among all exchanges and market makers. The lowest ask price and the highest bid price are displayed in the NBBO and are not required to come from the same exchange. The best bid and ask price from a single exchange or market maker is called the “best bid and offer,” rather than the NBBO. Dark pools and other alternative trading systems may not always appear in these results, given the less transparent nature of their businesses.
Traders that want to execute orders larger than those available through the NBBO should use an exchange or market maker’s “depth of book” data or Level II market maker screens to know the other potential bid and ask prices that they could use to execute their order.
Benefits and Drawbacks of the National Best Bid and Offer
The NBBO helps ensure that all investors receive the best possible price when executing trades through their broker without worrying about aggregating quotes from multiple exchanges or market makers before placing a trade. This helps level the playing field for retail traders who may not have the resources to always seek out the best prices across multiple exchanges.
The drawback is that the NBBO system may not reflect the most up-to-date data, which means that investors may not get the prices they were anticipating when trades are actually executed. This is a major concern for high-frequency traders (HFT) who rely on quotes to make their strategies work, since they profit from extremely small price changes at volume.
Regulation NMS is also difficult to enforce because of the fast pace of trading and the lack of recorded NBBO prices. This makes it difficult for a trader to prove whether or not they received the NBBO price on a given trade. Investors should keep in mind that the prices may be stale in some cases and that not all prices may be reflected, since dark pools and other alternative trading systems may not have listed bid/ask prices.
NBBO and High-Frequency Trading
High-frequency traders generally invest in specialized infrastructure in order to directly connect to exchanges and process orders faster than other brokerages. In effect, they do not rely on SIP data for their buy/offer bids and take advantage of the latency between calculation of the NBBO and its publishing to mint profits. Recent research has focused on whether this enables them to front-run others.
According to a 2014 University of Michigan study, traders profited by as much as $21 billion by taking advantage of this latency. "By anticipating future NBBO, an HFT algorithm can capitalize on cross-market disparities before they are reflected in the public price quote, in effect jumping ahead of incoming orders to pocket a small but sure proﬁt. Naturally, this precipitates an arms race, as an even faster trader can calculate an NBBO to see the future of NBBO, and so on," the study's authors write.
Example of NBBO
Suppose a broker receives the following orders to purchase stock for company ABC:
- 200 shares for $1,000
- 300 shares for $1,500
- 100 shares for $800
- 350 shares for $1,600
At the same time, the following are available sale prices for the same company's stock:
- 100 shares for $900
- 200 shares for $1,200
- 150 shares for $950
The NBBO for ABC is $1,600/$900, because they are the best bid/offer prices available to traders within the given range.