What Is Trade Execution?

Trade Execution Explained in Less Than 5 Minutes

Definition

Trade execution is the process your broker follows to submit a buy or sell trade order on a given market and it gets fulfilled.

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Definition and Example of Trade Execution

Each time an investor submits an order, the broker takes that order to the market to execute at the best possible price. Where that order is sent and how it is processed are determined by each broker. Your broker has a duty to execute each order at the best price available.

Note

Once the order has been sold on the market at a given price, it is then considered an executed trade. This process is known as trade execution.

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.

Note

Often, the price you get is even better than the price you saw on the order screen. This is known as “price improvement,” an event that occurs when your order is executed at a better price than the best-quoted market price. The best-quoted market price is also referred to as the National Best Bid and Offer (NBBO).

Trade Execution vs. Settlement

Trade Execution Trade Settlement
The order for buying or selling securities is placed. The payment for securities bought or sold is in your account.
Contractual agreement that includes a transaction price The transfer of securities is officially made in exchange for money.
Occurs when the transaction is submitted to your broker (or the next market open day if submitted after hours) Generally occurs two days after the trade date; this is often referred to as “trade plus two” or “T+2.”

What It Means for Individual Investors

Generally, most investors may not even realize that they don’t have a direct connection to the securities markets. However, understanding how your orders are executed gives investors peace of mind knowing how their money is handled and how their shares are transferred.

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.

Key Takeaways

  • Trade execution is the process by which your broker receives and completes an order to buy or sell securities.
  • Brokers have multiple options to execute orders, including sending orders to major markets such as the NYSE or to a market maker.
  • Brokers have a duty to execute orders at the best price.
  • Trade settlement, when buying or selling is reflected in your account, occurs after trade execution.

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Sources
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  1. SEC. “Trade Execution.”

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