17 May 2021
There are many different terms related to the buying and selling of equities. Some of them are relatively technical and, in most cases, don’t necessarily need to be fully understood to prevent someone from having a working understanding of how the process operates. However, it’s a crucial point in the entire process and an important one to understand when it comes to trade execution.
While it may sound relatively simple, there is often confusion about what it really means. Here we’ll take a look at what trade execution is, why it’s essential, and how a trade is executed.
Trade execution is the term given to describe the point at which a buy or sell order is finally fulfilled, not when an investor submits the trade. Only when the order is in the market and is then fulfilled can it be said to have been executed. Because aiming for a particular result in terms of the price depends on speed, the best execution would be when there is low latency between when the order was placed and when it is finally executed.
Here are some of the various forms of trade execution:
A market maker is a firm that buys or sells a stock, and a broker may choose to direct an order to them rather than sending the order to the market. To attract brokers, the market maker may pay the broker to direct the order to them. This is known as a “payment for order flow.”
Over the counter market maker
Investors can choose to trade the stocks over the counter. When this is the case, an over the counter market maker can make a payment to a broker to direct the order to them.
Electronic Communications Network
An Electronic Communications Network (ECN) matches offers and bids without the need for market makers. Earnings are made in turnovers rather than spreads, and the levies charged on trade are very small; a few cents or pence.
The order book of the ECN is anonymous, and they receive orders from brokers or brokerages. These orders will then be matched with bid prices in the order book, and once a match is found, the trade execution can take place.
With the availability of open trading systems, the potential pool for matching bids has been extended. If a corresponding bid match can’t be found on one network, orders can be matched on other systems. This open system brings with it a range of benefits to investors, not least the speed at which trade execution can take place, aiding low latency.
If a broker’s firm already owns shares in a stock, then the trade can be completed in-house, filling the order with the broker’s own inventory.
Brokers are required to execute a transaction to achieve the best outcome for their clients. To do this, they will evaluate all the orders they receive from their clients and then assess which ECN or market maker will offer the best execution prices.
With a global reach and a team of brokers with vast Tier-1 experience, Global Investment Strategy trade execution services are industry-leading. Our execution-only brokerage services have low latency, meaning your orders are executed in as timely and immediate a fashion as possible.
Email us at Global Investment Strategy today at email@example.com to find out more about our range of trade execution services.Back to News