What the NBBO Is
The NBBO is calculated by the Securities Information Processor (SIP), which aggregates quote data from all U.S. stock exchanges. At any moment, the NBBO reflects the best available buy price (the bid) and the best available sell price (the ask) across all exchanges. The spread between the bid and ask is one of the key metrics of market quality — narrower spreads mean lower implicit trading costs for investors.
The Trade-Through Rule
SEC Regulation NMS (National Market System) includes a 'trade-through' prohibition that bars executing trades at prices worse than the NBBO. Market makers must execute at the NBBO or better. This 'price protection' rule is designed to ensure that investors receive the best available displayed price. Violations of the trade-through rule are among the most serious market conduct violations.
Price Improvement Claims
Market makers including Citadel Securities claim to provide 'price improvement' — executing retail orders at prices better than the NBBO. This is one of the primary arguments in favor of PFOF: that market makers provide better prices than exchanges. Critics argue that the price improvement offered is often minimal, and that the potential for improvement from a truly competitive auction (as proposed in SEC 2022 reforms) would be greater.
How Retail Investors Are Affected
For a retail investor, the difference between the NBBO and the price they actually receive on each trade can be a few tenths of a cent per share. This seems trivial on any single trade, but multiplied across many trades and many investors, it aggregates to substantial sums. Academic estimates of the annual cost to retail investors from suboptimal execution in the PFOF system vary but are in the billions of dollars range, according to published research.