National Best Bid and Offer
The National Best Bid and Offer (NBBO) refers to the SEC rule that requires brokers to guarantee that customers receive the best prevailing ask price when they purchase securities and the best prevailing bid price when they sell securities. This includes prices from all competing market centers (exchanges) and refers to the price at the time of entry into the market.
NBBO is the bid and ask the average person will see. Day traders using Level 2 market maker screens see ALL the bids and offers for a particular stock. The NBBO is updated throughout the day to show the highest and lowest offers for a security among all exchanges and market makers.
ABC Exchange is posting a bid of 1,000 shares at $10.00 and an offer of 500 shares at $10.10 in security XYZ. Another exchange is posting a bid of 200 shares at $9.90 and an offer of 200 shares at $10.08 in XYZ. In this case, the NBBO would be 1,000 shares at a $10.00 bid and 200 shares at a $10.08 offer.
When shares of an order to buy (sell) a security are executed at a price better than the best offer (bid) at the time of order entry.
A market order to buy 500 shares of XYZ is entered when the NBBO is 500 shares at $10.10. 300 shares are bought at $10.08 while the remaining 200 shares are executed at $10.10. In this case, 300 shares received $0.02 per share ($10.10-10.08) of price improvement while the remaining 200 were executed at the NBBO.
Shares executed outside the NBBO
When shares of an order to buy (sell) a security are executed at a price worse than the best offer (bid) at the time of order entry.
A market order to buy 500 shares of XYZ is entered when the NBBO is 300 shares at $10.10. 300 shares are bought at $10.10, exhausting the NBBO, while the remaining 200 shares are executed at $10.11. In this case, 300 shares were executed at the NBBO while the remaining 200 at $0.01 per share ($10.11-10.10) were outside the NBBO.
- The SEC's customer disclosure rule, SEC Rule 605, requires market centers (exchanges) to disclose monthly data about the quality of their trade executions.
- SEC Rule 606, specifies that broker-dealers that route orders on behalf of customers must prepare quarterly reports that disclose the following information:
a. The percentage of total customer orders that were non-directed orders and the percentages of total non-directed orders that were market orders, limit orders, or other orders. (A non-directed order is any order that the customer has not specifically instructed to be routed to a particular venue for execution);
b. The identity of the venues to which a significant percentage of total non-directed orders were routed for execution;
c. The percentage of total non-directed orders routed to the venue, and the percentages of total non-directed market orders, non-directed limit orders, and non-directed other orders that were routed to the venue; and
d. Terms of the material aspects of the broker-dealer's relationship with each venue identified above, including a description of any arrangement for payment for order flow and any profit-sharing relationship
These reports are required to be made public for each calendar quarter and published no later than one month after the end of the quarter. Another piece of this rule requires annual public notification that the detail is available.
As a result, customers can request details from their investment representative on the identity of the exchange to which the customer's orders were routed for execution in the 6 months prior to the request, whether the orders were directed, at the customer's request, to a specific venue for execution and the time of the executions, if any, that resulted from those orders. Customers also may request up to 6 months of this information in hard copy through a representative on all orders for a specific time period and/or on individual securities. The collection period for this information began on July 2, 2001.