What Is an Execution?
Let me explain execution directly: it's the completion of your buy or sell order for a security. You need to know that this happens when the order is actually filled, not just when you place it. When you submit a trade, it goes to your broker, and they figure out the best way to get it done.
Key Takeaways
Execution means filling your buy or sell order in the market, based on any conditions you set. You'll find there are multiple ways to execute trades, from manual processes to automated ones. Remember, brokers are legally bound to find the best execution for your trade.
Understanding Execution
Brokers have a legal duty to provide you with the best execution possible. The SEC mandates that they report execution quality on a per-stock basis and inform you if your order wasn't routed for optimal execution. Thanks to online brokers, execution costs have dropped significantly. Many offer commission rebates if you hit certain trade volumes or values each month—this matters a lot if you're a short-term trader keeping costs low.
If your order is a market order or something that converts quickly to one, it's likely to settle at your desired price. But with large orders split into smaller ones, it can be tough to get the best price, introducing execution risk. This risk is the delay between placing your order and its settlement.
How Orders Get Executed
Orders can go to the floor, where a human trader handles it—this takes time as the floor broker receives and fills the order. They might go to a market maker on exchanges like Nasdaq, where these entities provide liquidity and your broker directs the trade there.
Another option is an Electronic Communications Network (ECN), where computers match buy and sell orders efficiently. Or there's internalization: if your broker has the stock in inventory, they might execute it in-house, calling it an internal crossing.
Best Execution and Broker Obligations
By law, brokers must give you the best order execution. There's debate on whether they always do, or if they're routing for other reasons like extra revenue. For instance, say you want to buy 1,000 shares of TSJ Sports Conglomerate at $40, place a market order, and it fills at $40.10—that costs you an extra $100. Some brokers claim they fight for better prices, but it's not guaranteed, especially with limit orders where seeking improvement can slow things down.
The market itself might cause misses on quoted prices, particularly in fast markets. Brokers balance executing in your best interest with their own. The SEC tips the scale toward you with rules requiring reports on execution quality, including comparisons to public quotes. If a broker beats public quotes on a limit order, they must report it. This helps you see who delivers real value versus marketing hype.
Plus, the SEC requires brokers to notify you if your order isn't routed for best execution—usually on your trade confirmation, though it often gets overlooked.
Execution and Dark Pools
Dark pools are private exchanges for institutional investors to execute large orders without revealing quantities. Since they're used by big players, it's easier to find liquidity and better prices than on public exchanges like Nasdaq or NYSE. Placing a large order publicly shows in the order book, potentially moving the price against you.
Most dark pools execute at the mid-point of bid and ask, aiding best execution. For example, with a $100 bid and $101 ask, your order might fill at $100.50 if a match exists. Retail investors often view dark pools skeptically due to their opacity and inaccessibility.
Example of Execution
Suppose you enter an order to sell 500 shares of stock ABC at $25. Your broker must find the best price. They check and can execute internally at $25.50, better than the market's $25.25. They do it in-house, netting you an extra $125 profit.
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