# What Is the National Best Bid and Offer (NBBO)? How Quote Works

## What Is the National Best Bid and Offer (NBBO)?

The National Best Bid and Offer (NBBO) is a quote that reports the best available [bid](https://www.investopedia.com/terms/b/bidprice.asp) and [ask prices](https://www.investopedia.com/terms/b/bestask.asp) for securities across all U.S. exchanges.  

Security Information Processors (SIPs) play a role in calculating and disseminating NBBO values as part of the National Market System Plan (NMSP).

The U.S. Securities and Exchange Commission's (SEC's) [Regulation NMS](https://www.investopedia.com/terms/r/regulation-nms.asp) requires brokers to trade at the best available ask and bid prices when buying and selling securities for customers and guarantee at least the NBBO quoted price to its customers at the time of a trade.

Advantages of NBBO include ensuring fair market participation via the best possible price when executing trades, and disadvantages include data latency issues and difficulty of enforcing Regulation NMS.

### Key Takeaways

*   The NBBO is a key component of the National Market System, providing the best possible prices by aggregating top bid and ask prices from multiple exchanges.
*   While the NBBO ensures investors get the best available prices, it may not always provide up-to-date data, which can affect price expectations during fast trades.
*   High-frequency traders can exploit the latency in NBBO data to capitalize on slight price differences and potentially front-run other market participants.
*   Traders seeking to execute larger orders might need to rely on additional data beyond the NBBO, such as depth of market or Level II screens, for more comprehensive pricing insights.
*   Alternative trading systems like dark pools may not be fully represented in NBBO data, highlighting transparency challenges in certain segments of the market.

## How the National Best Bid and Offer (NBBO) Works

Security Information Processors (SIPs) calculate and share the NBBO as part of the [National Market System Plan (NMSP)](https://www.investopedia.com/terms/n/national-market-system-plan.asp), which processes security prices. Two SIPs handle this task. The Consolidated Quotation System (CQS) provides the NBBO for securities on the [New York Stock Exchange (NYSE)](https://www.investopedia.com/terms/n/nyse.asp), NY-ARCA, and NY-MKT, while the Unlisted Trading Privileges (UTP) Quote Data Feed offers it for Nasdaq-listed securities.

All day, the NBBO updates with the highest and lowest offers from exchanges and [market makers](https://www.investopedia.com/terms/m/marketmaker.asp). The NBBO shows the lowest ask and highest bid prices, which may come from different exchanges. If both prices are from one exchange, it's called the "best bid and offer," not the NBBO. Dark pools and [other trading systems](https://www.investopedia.com/terms/a/alternative-trading-system.asp) often don't appear in NBBO results due to their less transparent operations.

Traders seeking larger orders than those in the NBBO should use [depth of market](https://www.investopedia.com/terms/d/depth-of-market.asp) data or [Level II](https://www.investopedia.com/terms/l/level2.asp) screens to find other bid and ask prices.

## Pros and Cons of the National Best Bid and Offer (NBBO)

The NBBO helps ensure that all investors receive the best possible price when executing trades through their broker without worrying about aggregating [quotes](https://www.investopedia.com/terms/q/quote.asp) from multiple exchanges or market makers before placing a trade. This helps level the playing field for [retail traders](https://www.investopedia.com/terms/r/retailinvestor.asp), who may not have the resources to always seek out the best prices across multiple exchanges.

The drawback of the NBBO is it may not show real-time data, so investors might not receive the expected prices when trades are executed. This is a major concern for [high-frequency traders (HFTs)](https://www.investopedia.com/terms/h/high-frequency-trading.asp), 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](https://www.investopedia.com/terms/d/dark-pool.asp) and other alternative trading systems may not have listed bid/ask prices.

## The Role of NBBO in High-Frequency Trading (HFT)

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. Research has focused on whether this enables them to [front-run others](https://www.investopedia.com/terms/f/frontrunning.asp).

According to a 2013 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 wrote.

## Real-Life Example of the National Best Bid and Offer (NBBO)

Suppose a broker receives the following orders to offer to sell stock for Company ABC:

*   200 shares for $1,000
*   300 shares for $1,500
*   100 shares for $1800
*   350 shares for $1,600

At the same time, the following are available bid prices for the same company's stock:

*   100 shares for $900
*   200 shares for $800
*   150 shares for $950

The NBBO for ABC is $950/$1,000 because they are the best bid/offer prices available to traders within the given range.

## The Bottom Line

The NBBO provides the best bid and ask prices from multiple exchanges. The SEC's Regulation NMS ensures that brokers offer trades at NBBO prices to protect investors.

Benefits of the NBBO include leveling the playing field for retail investors, while downsides include data latency that may affect price accuracy. Another challenge is enforcement of Regulation NMS, particularly for high-frequency traders and alternative trading systems like dark pools.

Investors, particularly those executing bigger orders, might need to turn to data in addition to the NBBO, such as depth of market or Level II screens, for a more complete picture of pricing insights.

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[Regulation NMS](https://www.sec.gov/rules/final/34-51808.pdf)."
>     
> 2.  Strategic Reasoning Group. "[Latency Arbitrage, Market Fragmentation, and Efficiency: A Two-Market Model](http://strategicreasoning.org/wp-content/uploads/2013/02/ec38-wah.pdf)."