Definition and Example of Trade Execution
How Trade Execution Works
Trade Execution vs. Settlement
What It Means for Individual Investors
Definition and Example of Trade Execution
Trade execution is the process your broker follows to place a buy or sell order in a specific market and carry it out. Each time an investor places an order, the broker takes that order to the market for execution at the best possible price. The destination of the order and how it is processed is determined by each broker. Your broker has a duty to execute every order at the best available price.
Once the order has been sold in the market at a certain price, that is considered trade execution. This process is known as trade execution.
For example, let’s say you decided to sell 15 shares of ABC stock at $99 per share. After placing your sell order, your broker takes that order to the markets to find the best possible price. Your broker may have options to execute this order at prices of $98, $99, and $100. Since $100 is the best available price, the broker executes the sell order for you at $100 per share.
How Trade Execution Works
The broker can execute an order in several ways once received. They can send that order to an exchange like the New York Stock Exchange (NYSE), to a market maker, to their own electronic communication network, or even execute the trade using their own inventory of securities. Here is an explanation of each:
- Market Exchange: Your broker can send orders to a major exchange like the New York Stock Exchange (NYSE) or NASDAQ for trade execution.
- Market Maker: This is a financial firm that buys and sells securities at publicly quoted prices.
- Electronic Communication Network (ECN): This is a network that automatically matches buy and sell orders at specified prices.
- Securities Inventory: Many brokers maintain an inventory of securities to execute buy and sell orders. This is also referred to as “internal trading.”
Although orders are generally submitted digitally, they are not instantaneous. They can even be broken down into different chunks for sale since stock prices are only available for a limited number of shares.
For example, if you submitted a sell order for 15 shares of ABC 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 price at which the trade is executed is not always the same price you see on the order screen when you place it with your broker.
The price you receive is often better than the price you saw on the order screen. This is known as “price improvement,” which is an event that occurs when your order is executed at a better price than the best market price available. The best market price available is also referred to as the “National Best Bid and Offer” (NBBO).
Trade Execution vs. Settlement
Trade Execution Settlement
- A buy or sell order for securities is placed.
- The funds corresponding to the purchased or sold securities are deposited into your account.
The legal agreement involving the transaction price. The transfer of securities is officially made for cash.
This occurs when the transaction is presented to your broker (or on the next market open day if it was submitted after business hours). It usually takes place two days after the trade date; it is commonly referred to as “trade after two days” or “T+2.”
What It Means for Individual Investors
Generally, most investors may not even realize they do not have a direct connection to the financial markets. However, understanding how your orders are executed provides investors with peace of mind knowing how their money is being handled and how their shares are being transferred.
Furthermore
Therefore, if you are a day trader, understanding your broker’s options for executing trades can make a significant difference in terms of money, as time and price are crucial.
Main takeaway:
- Trade execution is the process by which your broker receives and completes an order to buy or sell securities.
- Brokers have multiple options for executing orders, including sending orders to major markets like the New York Stock Exchange (NYSE) or to a market maker.
- Brokers are obligated to execute orders at the best available price.
- Settlement occurs when the purchase or sale process is reflected in your account.
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts presented in our articles. Read our editorial process to learn more about how we verify facts and maintain the accuracy, reliability, and quality of our content.
SEC. “Trade Execution”.
Source: https://www.thebalancemoney.com/what-is-trade-execution-5225128
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