Expanding On The Crash Yesterday: NBBO


Expanding On The Crash Yesterday: NBBO

Posted by Karl Denninger

If The SEC is anything other than a lying sack of squeeze, it must force all brokers to HONOR NBBO from yesterday’s trades.

The definition of NBBO is:

A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.

So during the collapse yesterday Accenture traded at 0.01, as the below shows:

But Accenture’s “Best Bid” was never 1 cent on the NYSE.

It was on some other markets (e.g. ECNs), and transacted there. 

That’s bogus folks.

That the NYSE was “slowing things down” and looking at orders before releasing matched orders does not excuse the broker’s responsibility to get you the best bid or offer.

Those 1 cent prints on Accenture and the ridiculously low prints on P&G and other stocks, at least for issues traded on the NYSE where there were in fact higher (better) bids, must be resolved in favor of the customer, with the brokerage eating the difference.

NBBO is not a suggestion.  It is, in fact, a hard requirement of the SEC.

Breaking the trades is unjust.  The correct remedy is to force the brokers to honor NBBO retroactively.

This means that if the brokerage reported a “fill” that couldn’t actually happen given the actual NBBO at the time, they get to eat it – they fraudulently reported a fill that could not have, given the NBBO at the time, gone off.  Likewise, fills that did occur on an NBBO basis but are radically disadvantageous to the brokerage must stand.

An example:

Accenture yesterday at 13:47 had a “best (highest) offer” on the NYSE (for example) at $33.00 (roughly.)  On a “third market” there were apparently “stink bids” for one penny.

So what?

The people who got filled are entitled to the NBBO at the time.

So the buyer is entitled to his one penny fill (since the brokerage said it went) but the seller is entitled to the NBBO at $33.00 as well.

That a brokerage or group of brokerages routed orders in violation of NBBO makes them the parties that should be on the hook for this.

Those trades should have never happened, as there was no “meeting of the bid and offer” required for a trade to transact.  But they did happen, and the responsibility for that having happened rests with the brokerages, which are required to implement NBBO in their systems – and clearly did not.

Yes, I recognize that shoving this down the brokerages throats would bankrupt a number of them. 

So what? 

The rules are what they are, and the sellers and buyers in an orderly market are entitled to rely on the published rules.  Those rules say that if I’m selling shares I have a right to be filled at the National Best Bid (that is, the highest) for my shares, and if I’m buying I have a right to the National Best Offer (that is, the lowest) for the shares I purchase.

That’s what NBBO is, and if the SEC does not demand and enforce that rule then we have a mockery of a market where alleged rules are simply ignored at any time when brokerages break them and forcing them to eat their own cooking would cause them to go bankrupt.

The test of the rule of law and procedures isn’t whether they work during “ordinary” times.  It is whether they are enforced when someone does something that is (1) under their complete control, (2) that action is taken without regard to the rules or law, and (3) someone is harmed as a consequence.

In this case lots of people were egregiously harmed.  Breaking trades is not the right answer as it is both unjust to refuse to honor a fill price for those who found advantage, and also unjust to screw a seller who got hosed through a fill that was in fact on the opposite corner of the market they were supposed to obtain.

This “little event” in fact calls into question whether NBBO exists at all in truth, in that while this is a wild example it raises the question of whether brokerages are matching outside of NBBO all the time, skimming off the transaction and screwing customers to the tune of billions on a routine basis.

Yesterday pulled back a curtain on something that isn’t being talked about anywhere in the mainstream media, but we damn well ought to be, because if those trades could execute outside of NBBO yesterday, they probably can and have on a routine basis every day, to your severe disadvantage.

You heard it here first.