National Best Bid and Offer (NBBO)

The National Best Bid and Offer (NBBO) is the best price that a buyer is willing to pay for a security and the best price that a seller is willing to accept. It is calculated by taking the highest bid price and the lowest ask price for a security. The NBBO is used as a reference point for trading and is often used to set the opening price for a security on the day it begins trading.

The NBBO is calculated by a system called the Consolidated Tape Association (CTA). The CTA is a private organization that collects trading data from all of the major stock exchanges in the United States. The CTA then uses this data to calculate the NBBO for each security that is traded on the exchanges.

The NBBO is an important tool for investors because it provides a reference point for the price of a security. Investors can use the NBBO to determine whether a security is overvalued or undervalued. They can also use the NBBO to set limit orders, which are orders to buy or sell a security at a specific price.

The NBBO is not always accurate, however. It is possible for the NBBO to be inaccurate if there is not enough trading activity in a security. In these cases, the NBBO may not reflect the true value of the security.

Despite its limitations, the NBBO is a valuable tool for investors. It can be used to help investors make informed decisions about when to buy and sell securities.

The NBBO is also used by market makers to facilitate trading. Market makers are firms that make markets for securities by buying and selling them at the NBBO. Market makers make money by buying securities at the bid price and selling them at the ask price. The difference between the bid price and the ask price is called the bid-ask spread.

The NBBO is an important part of the stock market. It provides a reference point for the price of securities and it is used by investors, market makers, and regulators.