National Best Bid and Offer (NBBO)
What it is:
The National Best Bid and Offer (NBBO) is the highest bid and lowest offer price quoted on Nasdaq.
How it works/Example:
For example, let's say the following people have buy orders (bids) for Company XYZ (these are the prices people are willing to pay for the stock):
100 shares for $20 per share
50 shares for $20.01 per share
150 shares for $19.79 per share
200 shares for $21 per share
The following people have sell orders (offers) for Company XYZ (these are the prices people are willing to accept for their shares):
100 shares for $22 per share
50 shares for $21.50 per share
150 shares for $20.01 per share
200 shares for $21.25 per share
The NBBO for Company XYZ is $21.00/$20.01. That is, the highest someone is willing to pay is $21 and the lowest someone is willing to accept for their shares is $20.01. The NBBO changes all the time, however, as orders enter and leave the market.
Why it matters:
The SEC requires brokers to guarantee their customers the best available ask price and the best available bid price when they trade securities, which is where the NBBO comes into play. The NBBO is also important to market makers, because they indicate what they should charge or expect for the shares they make markets for. Note that the SEC typically requires market makers to display limit orders for 100 shares or more, meaning that some of the orders in our example might not factor into the NBBO calculations because they are under 100 shares.