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Definition: European Best Bid Offer – EBBO
It states the best price available for a buy or sell of trading instruments available at exchanges such as stock. It is the European equivalent of National Best Bid and Offer. As is with stocks, investors want the lowest price for a buy and highest price for a sell. The EBBO methodology ensures that market participants always get the best price available in the market during that particular time. Generally implementation of EBBO means lowest ask price and highest bid price does not necessarily come from the same exchange.
The argument for EBBO is traders who want to execute large orders need to know the best prices available before investing in markets. The way EBBO works is that all orders will be fed into the system for execution or crossing at the middle point of the European Best Bid and Offer. The European best bid price is the binding price executed in central limit order books of regulated markets and Multi Traded Facilities (MTF) contributing to figuring out the EBBO. Hence EBBO offers the tightest spread available in contributing trading platforms.
But there is generally criticism of EBBO due to a lot of reasons. One of the reason is data may not be exactly up to date at that particular instant so investors may not get best prices available which they were anticipating. Another EBBO shortcoming is it is difficult to implement it is difficult to enforce as due to the amount of trading volume and multiple orders it will be difficult to prove that an investor received BBO on a trade.
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