Whether you’re shopping for a new car or stocks for your portfolio, chances are you want the best price possible. That often requires a little negotiation — a little bid-versus-ask action, in other words. With car negotiations, that action typically plays out aloud. But when it comes to investing and stock trading, the bid-versus-ask action happens behind the scenes and is often referred to as “NBBO.”
“NBBO” stands for the “National Best Bid and Offer,” and has to do with government market regulators requiring brokers to execute trades at a certain time.
How Does “Bid vs Ask” Work in the Stock Market
The “bid versus ask” price is also known as “the spread” (both terms are two of many terms investors and traders should know). If an investor is “bidding,” they’re looking to buy. If they’re “asking,” they’re looking to sell. It may be helpful to think of it in terms of an “asking price,” as seen in real estate.
The average investor or trader will typically see the bid or ask price when looking at prices for investment securities. Most of the bid-vs.-ask action takes place behind the scenes, and it’s happening fast, landing on an average price. These are the prices represented by stock quotes.
That price is the value at which brokers or traders are required to guarantee to their customers when executing orders. NBBO directs brokers to act in the best interest of their clients, getting them the most bang for their buck.
What Is NBBO?
The National Best Bid and Offer is a regulation put in place by the Securities and Exchange Commission (SEC) that requires brokers who are working on behalf of clients or customers to execute a trade at the best available ask price, and the best available bid price. The goal: To give their customer the best possible prices — whether low or high — whether they’re buying or selling a security.
Let’s run through a quick example of how the NBBO might work in the real world.
Let’s suppose that a broker has a few clients that want to buy a stock:
• Buyer 1 puts in an order to the broker to buy shares of Company X at $10
• Buyer 2 puts in an order to the broker to buy shares of Company X at $10.50
• Buyer 3 puts in an order to the broker to buy shares of Company X at $11
Remember, these are “bids” — the price at which each client is willing to purchase a share of Company X.
On the other side of the equation, we have another broker with two clients that want to sell their shares of Company X, but only if the price reaches a certain level:
• Client 1 wants to sell their shares of Company X if the price hits $12
• Client 2 wants to sell their shares of Company X if the price hits $14
In this example, the NBBO for Company X is $11/$12. Why? Because these are the best bid vs. ask prices that were available to the brokers at the time. This is, on a very basic level, how calculating the NBBO for a given security works.
How NBBO and “Bid vs Ask” Prices Are Calculated
To make those calculations on the fly requires a whole lot of infrastructure. Because the NBBO is updated constantly through the day with offers for stocks from a number of exchanges and market players, things need to move fast.
Most of the heavy lifting in NBBO calculations is done by Securities Information Processors (SIPs). SIPs connect the markets, processing bid and ask prices and trades into a single data feed. They were created by the SEC as a part of the Regulation National Market System (also called “Reg NMS ).
There are two SIPS in the U.S.: The Consolidated Tape Association (CTA) , which works with the New York Stock Exchange, and the Unlisted Trading Privileges (UTP) , which works with stocks listed on the Nasdaq exchange.
The SIPS crunch all of the numbers and data to keep prices (NBBO) updated throughout the day. They’re incredibly important for traders, investors, brokers, and anyone else working in or adjacent to the markets.
Is NBBO Pricing Up to Date?
The NBBO system may not reflect the most up-to-date pricing data. Bid, ask, and transaction data is flying around every millisecond, and it takes time to ingest and process it all. For high-frequency traders that are making fast and furious moves on the market, these small price fluctuations can cost them.
To make up for this lag time, the SEC allows trading via intermarket sweep orders (ISO), letting an investor send orders to multiple exchanges in order to execute a trade, regardless of whether a price is the best nationwide.
NBBO represents the crunching of the numbers between the bid-vs.-ask spread, and it’s the price you’ll see listed on a financial news network or stock quote. The NBBO adds some legal teeth for investors, effectively forcing brokers to execute trades at the best possible price for their clients.
For investors ready to start trading, the SoFi Invest® trading app lets you actively invest by trading stocks, ETFs, crypto, and more, or take a more hands-off approach with automated investing that’s based on your personal goals and risk tolerance.
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