For example, say you decide to sell 15 shares of ABC stock trading at $99 per share. After you submit your sell order, your broker takes that sell order to the markets to find the best possible price. Your broker has options to execute that order at $98, $99, and $100. Since $100 is the best price available, the broker executes the sell order for you at $100 per share.
How Trade Execution Works
A broker can execute an order in a number of ways once it is received. They can send that order to an exchange such as the New York Stock Exchange (NYSE), to a market maker, to their electronic communications network, or even carry out the trade using their own inventory of securities. Here’s an explanation of each:
Market exchange: Your broker can send orders to a major exchange trade floor such as the NYSE or Nasdaq to execute trade orders. Market maker: This is a financial firm that buys and sells securities at publicly quoted prices. Electronic communications network (ECN): An ECN is a network that automatically matches buy and sell orders at specified prices. Inventory of securities: Many brokers hold an inventory of securities from which they execute buy and sell trade orders. This is also referred to as “internalization.”
Although orders are generally submitted digitally, they are not instantaneous. They can even be split into different batches to sell since price quotes are only for a specific number of shares. For example, if you submitted your order to sell 15 shares of ABC stock at $99, your broker may only have the option to sell five shares at $98, five at $99, and five at $100 per share. The trade execution price isn’t always the same as the price you see on the order screen when submitting it to your broker.
Trade Execution vs. Settlement
Furthermore, if you’re a day trader, understanding your broker’s options for trade execution could be the difference of a lot of money since time and price are of the essence. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
