What is a National Best Bid and Offer (NBBO)
The National Best Bid and Offer (NBBO) is a Securities Exchange Commission (SEC) regulation requiring brokers to trade at the best available ask (lowest) price and the best available bid (highest) price when buying and selling securities for customers. The National Best Bid and Offer is the bid or ask price that the average customer will see. The Securities and Exchange Commission’s Regulation NMS requires that brokers guarantee their customers this price.
BREAKING DOWN National Best Bid and Offer (NBBO)
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.
The Consolidated Quotation System gives the NBBO for securities listed on the New York Stock Exchange, whereas the Unlisted Trading Privileges Quote Data Feed gives the NBBO for securities listed on the NASDAQ.
Pros and Cons of 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 to 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 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.
The Bottom Line
The National Best Bid and Offer is the lowest available ask price and the highest available bid price for investors buying and selling securities. While Regulation NMS requires that brokers provide NBBO prices to their clients, the regulations are difficult to enforce, and the fast pace of trading makes it difficult to keep information fresh at all times. 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.