Understanding Order Execution



Frequently, investors and traders do not completely understand what occurs when they press the “enter” button on their  online trading account. You are wrong if you think your order is always filled instantly after you click the button in your account. The truth is you might be surprised by the number of possible ways in which an order can be completed and the related time delays.Where and how your order is implemented can influence the cost of your transaction and the amount you pay for the stock.

A Brokers Option 

A common misconception among investors is that an Online account link the investor directly to the securities markets.

Whenever an investor places a trade, be it online or over the phone, the order goes directly to a broker.The broker will then check the size and availability of the order to select which trail is the best way for it to be performed.

A broker can attempt to fill your order in a number of ways:

Order to the Floor - With this order, the broker can direct your order to the floor of the stock exchange or to a regional exchange. In some cases, regional exchanges will involve a fee for the opportunity to execute a broker’s order, recognized as payment for order flow. It can take some time for the floor broker to get to your order and fill it, because your order is going through human hands.

Order to Third Market Maker –For stocks trading on an exchange like the New York Stock Exchange, the brokerage can direct your order to what  is called 3rd market maker.

A 3rd market maker may receive the order  if:

*They tempt the broker with an incentive to direct the order to them

*The broker is not a member  firm of the exchange in which the order would otherwise be heading for.

Internalization- This happens when the broker chooses to fill your order from the list of stocks of your brokerage company. This can create a quick execution. In this kind of execution, your brokers company can make extra money on the  spread.

Electronic Communications Network (ECN) - ECNs automatically buy and sell orders. These methods are used specifically for limit orders because the ECN can match by price very fast.

Order to Market Maker -In this order, your broker can direct your trade to the market maker in control of the stock you wish to buy or sell. Some brokers  make extra money by sending orders  to specific market makers (payment for order flow), this is usually timely. This also means that your broker may not be sending your order to the best possible market maker at all times.

Notice that your broker has different purposes for directing orders to specific position.

Apparently, they may  be more motivated to internalize an order to earn profits through the spread. Furthermore, some may send an order for a regional exchange or may be eager for a 3rd market maker and get payment for order flow. Keep in mind that whatever choice your broker makes can influence your bottom line.

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