What is Trade Execution?

What is Trade Execution?

Trade execution is when a buy or sell order gets fulfilled. In order for a trade to be executed, an investor who trades using a brokerage account would first submit a buy or sell order, which then gets sent to a broker. On behalf of the investor, the broker would then decide which market to send the order to. Once the order is in the market and it gets fulfilled, only then can it be considered executed.

The timing and method used for the trade execution will affect the price investors will end up paying for the stock. The timing is important to note because trades are not executed instantaneously. Since trades need to go to a broker before going to the market, stock prices may be different than what the investor ordered by the time the trade is fulfilled.

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.”1
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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.

Not All Trades Can Be Executed

Not all trade executions can be fulfilled. For example, a buy order may be very large and cannot be filled at the same time. It will be broken down into smaller orders so it will be easier to fulfill. In such a case, the trade will be executed at different times and at different prices.

Additionally, a limit buy order and a limit sell order may not always get executed as well. A limit buy order will not be executed if the stock price is always higher than the limit buy order price. A limit sell order will also not be executed if the stock price is always lower than the limit sell order price.