Decoding Trade Execution
Execution is the completion of a purchase or sale order for security. The execution of an order takes place when it is filled out, not when it is placed by the investor. When an investor submits the trade, it is sent to the broker who will, then, determine the best way to carry it out.
A broker is required by law to offer the best possible execution to its investors. The Securities and Exchange Commission (SEC) allows brokers to report on stock-by-share accuracy of their executions, as well as alert customers who did not have their orders routed for best execution. Due to the growth of online brokers, the cost of executing trades has significantly decreased. Many brokers offer a commission rebate to their customers if they perform a certain amount of trades/dollar value per month. This is specifically important for a short-term trader as it is necessary to keep the execution costs as low as possible.
How Does an Order Get Executed?
- Order to Floor: This can take time because the transaction is processed by a human trader. Such an order must be issued by the floor broker and filled in.
- Order to Market Maker: Market makers are responsible for providing liquidity on markets like the Nasdaq. The broker to the investor may direct the trade for execution to one of those market makers.
- Electronic Communications Network (ECN): An effective process by which computer systems coordinate, buy, and sell orders electronically.
- Internalization: If a broker holds an inventory of the stock in question, it can make a decision to execute the order in-house. A broker can refer to this as an internal intersection.
