Dec 14 2006
So, you’re an existing investor / speculator / punter (regardless of which category, your main intention is to make money) who has an account with a broker firm within your area. Or you’re new to this exciting game of stocks investing and option trading of which you’re very eager to get yourself started by planning to open an account very soon.
Regardless of whether you’re an existing or new player in this game, you need to know more than just fill-up a paper or electronic form for submission. Now, let’s talk about NBBO – short for National Best Bid and Offer. If you already knew about this, then you may skip the remaining info otherwise please understand what is these little 4 characters.
In short, National Best Bid and Offer (NBBO) is a SEC regulation requiring brokers to guarantee customers the best available
ask price when buying securities, and the best available bid price when selling securities.The NBBO is updated throughout the day to show the highest and lowest offers for a security in all exchanges and market makers.
Why is this NBBO thingy important? Before online trading exists, there used to be wide difference between bid price and ask price – the difference between these two is known as spread. Who do you think set this spread at the first place? The “Market-Makers”, of course, and the intention is obviously to make money out of the difference. By offering you the highest possible ask price when you buy and offering another person the lowest possible bid price when he/she sell, the market-makers created a huge gap and made the handsome gain of the difference.
But with NBBO, this terrible news is haunting the market-makers as the competition to offer the best available ask price and bid price increases resulting in narrower bid and ask spreads. However the Securities & Exchange Commission (SEC) has found some brokers appear to be allowing payment for “Order Flow” (FinanceTwitter will talk about this in another article) to affect which markets they send their orders in pretext that customers prefer speed execution.
So, start checking with your broker if they’re offering the NBBO – demand a black-and-white agreement to support this (normally brokers which honor NBBO have this stated within their agreement with the customers).
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December 14th, 2006 by financetwitter
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