Execution Quality Definitions
Quoted spread is measured by using displayed quotations from the consolidated tape. Cboe records all market center Best Bid and Offer (BBO) values, as well as the National Market Best Bid and Offer (NBBO), every millisecond. For reporting purposes, a market center’s quoted spread is calculated by taking each market center’s current best offer and subtracting that market center’s current best bid, and then averaging those values for the day. Quotations with a size or price of zero are ignored. The NBBO quoted spread is calculated using the difference between the National Best Offer and the National Best Bid.
Cboe BBO: 10.01 X 10.02
Cboe Quoted Spread for this instant = $0.01
Effective spread is designed to measure marketable orders executed in relation to the market center’s quoted spread and takes into account hidden and midpoint liquidity available at each market center. Effective Spread is calculated by using eligible trade prices recorded to the consolidated tape and comparing those trade prices to the National Best Bid and Offer “NBBO” at the time of the execution.
For purposes of calculating the effective spread on executed marketable orders, Cboe measures the execution price against the NBBO in effect at the millisecond in which the execution occurs. This methodology differs from Rule 605’s calculation of effective spread, which measures the execution price against the NBBO at the time of receipt of the marketable order, as measured to the second.
The lower the effective spread, the more volume a market center executes at prices near the midpoint of the NBBO, or with price improvement. Effective spread is designed to measure a round trip trade and thus is calculated by taking double the absolute value of the difference between the trade price and the midpoint of the NBBO at the time of each execution. The data is then volume-weighted to arrive at each market center’s effective spread for the day.
The effective spread statistics Cboe provides on its website are designed to supplement our Rule 605 reports.
NBBO Spread ($) = |Trade Price – Midpoint of NBBO| x 2
NBBO Spread Value ($shares) = NBBO Spread x Shares Executed
Effective Spread ($) = Sum of all NBBO Spread Values / Total Shares Executed
NBBO: 10.00 x 10.01
Cboe executes 1,000 shares at 10.005 and 2,000 shares at 10.01 for the day. NBBO is 10.00 x 10.01 for both executions.
Cboe Effective Spread = $0.0067
In the market quality web charts, market centers are ranked in order from lowest to highest effective spread. These rankings reflect the average effective spread for executions occurring in the previous trading month, rounded to five decimal places. In the event of a “tie,” where two or more market centers have the same average effective spread, market centers are sorted alphabetically by name.
Effective spread values for executions reported via the TRF are included below the red line in the individual symbol charts. The TRF is not considered in the effective spread rankings.
Effective/Quoted Spread Ratio (E/Q)
Effective/quoted spread ratio is calculated by dividing a market center’s effective spread by the NBBO quoted spread. The resulting ratio, also referred to as E/Q, is a very useful measurement as it allows the effective spread of a market center to be compared to the industry NBBO. E/Q also measures the overall average amount and quality of price improvement provided by a market center.
An E/Q of 0.60 indicates that on average this market center’s effective spread is 40% tighter than the NBBO quoted spread.
Price Improvement / Share
Price improvement per share provides the average amount of price improvement in dollars per eligible share executed at each market center. Price improvement per share is determined by calculating the difference between the trade price and the NBBO (NBO for buys and NBB for sells) for each execution to arrive at a net price improvement value for each trade. All net price improvement values are then volume averaged to arrive at the price improvement per eligible share for each market center. Negative price improvement values are possible when trades occur outside of the NBBO, which usually results from a slow quote update. Higher price improvement per share values are better than low, or negative, price improvement per share values.
Minimum Price Variation
The minimum price variation “MPV” is calculated by dividing the minimum tick size by the average trade price. For Regulation NMS Securities, the minimum tick size is $0.01 for stocks that trade at or above $1.00 per share. For NMS stocks below $1.00 per share, the minimum tick size is $0.0001.
The National Best Bid and Offer is the best (highest) bid and best (lowest) offer displayed by any market center quoting a specific security to the consolidated tape.
The quoted spread divided by the minimum price variation, less one. "N/A" signifies that a market center has no quoted spread for the day in the given symbol.
Average Trade Price
The total notional value divided by the total volume. Total notional is determined by calculating the sum of the trade price times the shares executed for each execution reported.
Tape Volume (Market Center)
Total volume by market center reported to the Consolidated Tape.
Tape Volume (All Market Centers)
Total volume reported to the Consolidated Tape.
The shares used for each market center in the calculation of Price Improvement per Share and Effective Spread. A number of assumptions are made in order to determine which transactions are eligible for inclusion in these metrics. Specifically,
- Trades that occur above the midpoint of the NBBO are assumed to be buys
- Trades that occur at or below the midpoint of the NBBO are assumed to be sells
- Opening and Closing Auction trades are not included (CTA and UTP sale condition of ‘O’ or ‘6’)
- Trades that are marked as trade through exempt and occur outside the NBBO are not included
- Trades that occur when the NBBO is locked or crossed, or is undefined are not included
- Trades that occur at a price more than 10% outside the NBBO spread are assumed to be erroneous and are not included
- Trades that are marked as cancels or corrections are not included
- Trades that are not last sale eligible are not included (see note below)
In addition to other criteria noted above, trades will not be included in the effective spread calculations or in the price improvement calculations if they are not last sale eligible. The following rules are applied to transactions from the Consolidated Tape to determine which trades are last sale eligible:
CTA – Consolidated Tape Authority
The SIP-provided “Consolidated High/Low/Last Price Indicator” on each long and short trade record will be used to determine whether or not the trade is last sale eligible. Trades will be included if the value is any of “D”, “E”, “F”, or “G” per section 11.10 of the CTS Output Specification, Rev 66, June 27, 2012.
UTP – Unlisted Trading Privileges
The SIP-provided “Consolidated Price Change Indicator” on each long and short trade record will be used to determine whether or not the trade is last sale eligible. Trades will be included if the value is any of “1”, “3”, “5” or “7” per section 6.0 of the UTDF Specification, Version 13.0b, August 27, 2012.
SEC Rule 605 FAQ's and Adoption release:
All metrics are dependent on the integrity of the data received from the Consolidated Tape. Internal or external issues that result in dropped messages could affect the results.
The S&P 500 constituent list is available on the public web site below and is not guaranteed to be complete on any given day: http://us.spindices.com/indices/equity/sp-500