What is Trade Execution?

A trade execution indicates your stock order has been filled based on your specifications. Some traders set market orders that get executed regardless of the stock’s price, while limit and stop-loss orders must fulfill conditions before getting executed. While trade executions seem straightforward, there are a few things that happen in the background each time you place an order.

How Does Trade Execution Work?

Every trade execution starts with an order. The investor decides the price to buy or sell shares. Once those conditions get met, your broker executes the trade and makes corresponding changes to your portfolio. If you bought 50 shares, you would see those 50 shares in your portfolio.

Why Does Trade Execution Matter?

Trade executions allow you to buy or sell shares at the price point you designated. Trade executions that are done properly increase trust in brokerage firms and the stock market. These trade executions impact your buy and sell prices, which affect your total returns. 

Different Types of Trade Execution Methods

Stock order executions feel simple enough for investors. Shortly after getting an order filled, investors see the corresponding changes in their portfolios. However, brokerage firms have to decide which approach to use for stock order executions. Brokerage firms have these choices for each stock order execution.

Order to the Floor

The broker can execute your stock order through the floor of a public stock exchange, such as the New York Stocke Exchange (NYSE). Order to the floor is a common way to execute stock trades, but it is not the only option.

Market Maker

Market makers are firms that buy and sell stocks. Some brokerage firms will trade stocks with these market makers instead of going to the market. Brokerage firms work with market makers to collect additional revenue by sending their orders to the market maker. This process, known as payment for order flow, gives the market maker more orders and gives brokerage firms another income stream.

Over-the-Counter (OTC) Market Maker

Over-the-counter market makers follow the same approach as non-OTC market makers. However, OTC market makers specialize in stocks that trade over the counter. OTC stocks trade on Alternative Trading Systems instead of traditional exchanges, such as the NYSE.

Electronic Communications Network (ECN)

Electronic communications networks are computer systems that automatically buy and sell stocks based on the filled order. These computer systems help with any type of stock order, but they are especially useful for limit orders.

Internalization

Brokerage firms hold onto many stocks and may have enough available shares to facilitate your order in-house. This process, known as internalization, allows a broker to profit from the execution through the bid-ask spread.

Brokers Obligations for Order Execution

Stockbrokers are legally obligated to give investors the best possible order execution in any given situation. The broker must do its best to provide the price investors expect, but that doesn’t always happen. If you place a premarket stop loss trailing order that caps your losses at 5%, and the stock goes down 15% before the opening bell, you will end up with a loss above 5%. The broker is obligated to do the best it can to fulfill your request within reason.

Execute Orders with These Trusted Brokers

A trusted stockbroker can execute orders at reasonable price points. These brokers tend to have additional features that make it easier to invest and reach financial goals. If you are looking for a new stockbroker or want to get started on your journey, these trusted brokers can help.

Your Broker Works Hard Behind the Scenes

For a stock investor, an order execution seems simple. You receive shares you purchased or get rid of shares you sold. However, brokers work behind the scenes to ensure you get the most optimal order execution. Brokers have relationships with several groups that help them get better prices on order executions and reward investors in the process. You will have to execute many stock orders on your path to a large portfolio.

Frequently Asked Questions