Investors buy and sell stocks every day, and when they do, they rely on brokers to execute trades on their behalf. As the brokerage industry has evolved, policymakers have become increasingly concerned that unscrupulous brokers could take advantage of their power and position by failing to handle trade executions in their customers' best interest. The Securities and Exchange Commission created what's now known as the National Best Bid and Offer regulation in order to prevent this from happening.
U.S. Securities and Exchange Commission building. Image source: Flickr via Scott S.
What the National Best Bid and Offer regulation says
You can find the National Best Bid and Offer regulation in the Code of Federal Regulations at 17 CFR 242.600(b)(42). It reads as follows:
National best bid and national best offer means, with respect to quotations for a [National Market System] security, the best bid and best offer for such security that are calculated and disseminated on a current and continuing basis by a plan processor pursuant to an effective national market system plan; provided, that in the event two or more market centers transmit to the plan processor pursuant to such plan identical bids or offers for an NMS security, the best bid or best offer (as the case may be) shall be determined by ranking all such identical bids or offers (as the case may be) first by size (giving the highest ranking to the bid or offer associated with the largest size), and then by time (giving the highest ranking to the bid or offer received first in time).
That's a mouthful, but the idea behind the National Best Bid and Offer regulation is actually quite simple. When a broker gets a buy order from a customer, the broker is required to execute the purchase request at the lowest available ask price in the market. Conversely, on sell orders, the broker must execute the sale at the highest available bid price at that time.
How can I check to see if my broker is following the regulation?
Brokers are required to follow the National Best Bid and Offer regulation, but it can tough for investors to get the information to verify that their brokers are indeed acting in their best interests. One thing you can do is to get access to live feeds that provide current orders. Exchanges and market-makers often make order books available, which include outstanding limit orders at various price points. Alternatively, you can get what's known as level 2 quote data, which has similar information.
When you enter a market order, you can often see your trade execute in real time. If the price you get is markedly different from the prevailing bid or ask price at the time you entered the trade, then it's worth double-checking with your broker to find out what happened. If your broker consistently fails to get best executions, then your best remedy is to find another broker who will.
Investors have to rely on the goodwill of their broker to represent them well. The National Best Bid and Offer regulation ensures that brokers will follow appropriate rules -- or be held accountable for breaking them.
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