{"id":142711,"date":"2025-03-19T01:24:03","date_gmt":"2025-03-19T01:24:03","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/finance\/why-nbbo-economics-have-become-distorted\/"},"modified":"2025-03-19T01:24:03","modified_gmt":"2025-03-19T01:24:03","slug":"why-nbbo-economics-have-become-distorted","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=142711","title":{"rendered":"Why NBBO Economics Have Become Distorted"},"content":{"rendered":"


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We recently studied how trades<\/a> speed around the marketplace \u2014 typically starting from a broker order in Secaucus, traveling at the speed of fiber to take orders on exchanges around the market, then causing a reaction function at the speed of microwave.<\/p>\n

Today, we are looking at how quote updates typically flow around the market.\u00a0<\/p>\n

What we find is that primary listing exchanges set the new National Best Bid and Offer (NBBO) most of the time. Then, most venues see orders arriving at a fairly consistent rate over time, but some venues have a rapid increase in quotes at the new NBBO within the first millisecond<\/a>.<\/p>\n

Whether that\u2019s good or bad for market structure and routers is an interesting question.<\/p>\n

Listing venues set the most NBBOs<\/strong><\/h2>\n

We look at who sets new NBBOs using venue timestamps across all exchanges. That removes any delays reporting new trades back to the SIP.\u00a0<\/p>\n

We see that primary exchanges set the new NBBO the majority of the time. That shouldn\u2019t be surprising, as primary exchanges also need to compete for company listings<\/a>, and companies compare them based on things<\/a> that reduce their costs of capital, such as consistent quotes and tight spreads.<\/p>\n

For example, Nasdaq market makers set quotes in Nasdaq-listed stocks close to 58% of the time. In contrast, all other exchanges combined improve the NBBO for Nasdaq stocks less than 43% of the time.<\/p>\n

Chart 1: More than half of the time new NBBO price is set by the primary listing exchange\u00a0<\/strong><\/p>\n

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Other venues join NBBO at different rates and speeds<\/strong><\/h2>\n

What does tend to happen more consistently is that other venues join (or copy) the NBBO prices that have been set on the primary.<\/p>\n

Importantly, we don\u2019t see all venues rushing to copy the NBBO quotes at exactly the speed of light. Instead, most exchanges see a consistent arrival of new orders as time (x-axis) progresses.<\/p>\n

But there are a few interesting exceptions:<\/p>\n