Building the true best market from many venues

Question

The same stock trades on two venues: - Venue A: 10.00 bid / 10.06 ask. - Venue B: 10.02 bid / 10.04 ask. What is the consolidated best market (the inside), and the fair mid? Why would you never price off a single venue?

Accepted Answer

Assemble the inside market. The best bid available anywhere is the highest bid; the best ask is the lowest ask: 	ext{best bid} = \max(10.00,\; 10.02) = 10.02 \;(	ext{Venue B}), 	ext{best ask} = \min(10.06,\; 10.04) = 10.04 \;(	ext{Venue B}). So the consolidated inside market (the "NBBO" in US equities) is 10.02 / 10.04, a 2-cent spread, much tighter than either venue looks on its own if you glanced only at Venue A's 6-cent market. Fair mid. 	ext{mid} = \frac{10.02 + 10.04}{2} = 10.03. Why never price off one venue. Suppose you quoted based only on Venue A's 10.00/10.06, thinking fair val…

Building the true best market from many venues

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