What is trade execution? Methods, restrictions
|What is trade execution?|
|Where do brokers execute trades?|
|How long does it take to execute a stock trade?|
|How to execute a forex trade?|
|Hot to execute a short trade?|
That’s right – it’s time to go a little deeper down the rabbit hole and a little more technical. Today, we’re covering the topic of trade execution and various trade execution services. Investors and traders don't always know what occurs when they press "enter" on their trading account. You might think your order will get filled right after clicking your account button, but that’s not always the case. In fact, you might be startled by the diversity of order-filling options and associated delays. Beyond that, how and where you execute your order might affect transaction costs, as well as stock prices. Let’s take a close look at this crucial topic.
What is trade execution?
When a buy or sell order is fulfilled, it’s referred to as trade execution. To execute a trade, an investor who uses a brokerage account must first submit a buy or sell order, which is then routed to a broker. The broker then determines which market to send the order to. Only once the order has been placed in the market and fulfilled can it be called executed.
Where do brokers execute trades?
Like you have a choice of brokers, so does your broker have countless choices when it comes to executing your trades. Here are few below:
- Order to the floor: Your broker may route an order for a listed stock to one of the many exchanges, such as the New York Stock Exchange (NYSE). Or they can route your order to what we call a market maker.
- Order to the market maker: A "market maker" is a firm that buys or sells stocks at quoted prices. Some market makers pay brokers a cent or more per share to route orders to them, AKA “Pay for order flow."
- Order to OTC market: Your broker may also transmit a so-called OTC market order, which refers to the over-the-counter market maker, like the OTC Markets Group. Your broker directs you to invest with the market marker in charge of the stock you want. Although, if they’re taking this path, that could mean they’re making additional money on your order, which is not ideal.
- Electronic Communications Network (ECN): Your broker may also decide to send your order, especially a limit order, to an Electronic Communication Network (ECN), which automatically matches buy and sell orders.
- Internalization: Alternatively, they may forward your order to another division of the firm to be filled from inventory. We call this "internalization.” Although, if this is the case, your broker might make money on the "spread" between the price it paid for the security and the price they offer it to you.
How long does it take to execute a stock trade?
The settlement date for a stock trade typically happens (T + 2) business days following the day the order executes. So, that would be your trade date plus two more days. So, let’s say you placed an order on Monday. That means your order will typically settle on Wednesday. Although, you should note that settlement occurs at a later date for certain products, such as mutual funds.
How to execute a forex trade?
The process of placing and executing a forex trade is simple and straightforward, especially when you use the amana app:
1. Enter the asset you want to trade in the search bar
2. Select the ‘order ticket” icon
3. Select “BUY” or “SELL”
4. Enter the amount of US Dollars or Units of the asset you wish to trade.
5. If you want to place a market order, make sure it says: “Market Price” under “ BUY/SELL AT.” If you want to place a price order, then press on “market” and enter the price you want to buy or sell.
6. Then press on “Place Order,” and that’s it!
Hot to execute a short trade?
To execute a short trade, you’ll need margin trading enabled on your account so that you can borrow money to short a stock. Each stock you sell short is a margin loan from your account, and you’ll be charged interest on the amount borrowed. Therefore, you must guarantee the loan with adequate equity.
The stock comes with an additional fee known as the "cost of borrow," which could be as low as a few percent of the total loan amount per year, or as high as a significant percentage. This is the cost incurred when employing a broker to locate shares suitable for short sale. If the corporation pays dividends, you'll be responsible for those, too Those costs will be added to your margin balance.
So, how important is execution order? Well, its significance and implications are contingent on the specifics of the situation, in particular the kind of order that’s being placed. If you place an order with a limit, for example, the only danger you face is that the order might not be filled. But when you place a market order, the speed of the execution and the price at which it is completed become increasingly significant.