How do NBBO Quotes Help in Trading?
1. More comprehensive bid & ask information
With Level 1, the best bid and ask come only from Nasdaq quotes. NBBO, however, updates the highest and lowest offers for a security among all 16 U.S. exchanges during trading hours. The best ask and bid do not have to come from the same exchange, as long as the order is made of at least 100 shares.
The example below shows that in NBBO quotes, the best bid price for the security is $144.34, from ARCA (NYSE Arca, Inc.), and the best ask price is $144.39, from EDGX (Cboe EDGX Exchange, Inc.). Investors could set an appropriate limit price to trade based on this information.
2. A fuller view of transaction data
Unlike Level 1 Quotes, which only displays transactions executed within the Nasdaq execution system and trades reported to the FINRA/Nasdaq TRF, the NBBO Quotes’ transactions data covers 16 mainstream U.S. exchanges and FINRA TRF OTC data.
In the example below, you can see that during the minute of 19:43 EDT, there were 20 trades on NBBO Quotes. In Level 1 Quotes, there were only 2 trades. You can also see the exchange that executed each trade through NBBO.
Time & sales are available to investors on any time frame, but it is generally more often used by very short-term investors, such as day traders. Some investors may look for significant changes in volume to execute their trading strategies.
3. Closer track of market trends
Investors often try to predict future price movements based on historical transaction prices. Therefore, price chart is an important source of information that investors analyze. As NBBO covers more transaction data than Level 1 Quotes, it gives investors access to a more comprehensive picture of trends in securities.
The picture below displays the real-time price movement of Level 1 Quotes and NBBO Quotes for the same security over the same period. It is not difficult to see that the line shown in NBBO Quotes appears much volatile than in Level 1 Quotes.
