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 bid and ask prices. The best available bid price is the highest bid price and the best available ask price is the lowest ask price at any particular point in time. The SEC requires brokers to guarantee this price to their customers. The NBBO is appliable only to NMS (National Market System) equity stocks traded on exchanges.
Since a stock can be traded on any of the recognised exchanges in the USA, for the purpose of calculating the NBBO, information must be collated from all the exchanges. 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.
Let's suppose NYSE is posting a bid for 1,000 shares at $25.00 and an offer of 500 shares at $25.10 in Bank of America's stock. At the same time, NASDAQ is posting a bid for 200 shares at $24.90 and an offer of 150 shares at $25.08. The National Best Bid would be 1,000 shares at $25.00 and National Best Offer would be 150 shares $25.08.
For example, if the market (irrespective of which exchange the order is routed to) receives a buy order for 500 shares of BofA at $25.10 then 150 shares are executed at $25.08 (the National Best Offer) and the remaining 350 shares will be executed at $25.10.
Meaning of some terms under the rules
Bid and Offer
The term "bid" or "offer" means the bid price or the offer price communicated by an exchange member or member of a national securities association to any broker or dealer, or to any customer, at which it is willing to buy or sell one or more round lots of a covered security, as either principal or agent, but shall not include indications of interest.
Member of national securities association
This includes OTC market makers, members of Alternative Trading Systems (ATS), members of Electronic Communication Networks (ECNs), and other members of National Association for Security Dealers (NASD) but are not market makers.
This is defined by NMS as "any person that is not a registered broker-dealer".
END OF MY NOTES
First updated on 8th September 2020.