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I want to know how an order gets executed at exchange level once I place an order through an online broker.

If i place a buy order for 1000 shares of XYZ Company, does it execute at one exchange? or multiple?

Also, how is it determined which exchange will my trade go to?

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    It might not reach the exchange before it gets filled, if the broker use their own pool of trades.
    – DumbCoder
    Commented Mar 31, 2014 at 7:59

2 Answers 2

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I used to work on the software in the front office (and a bit of the middle office) of a brokerage firm. This page describes the process pretty well. Basically there are three parts:

  1. Front office: this is what the customer sees. The sales person or the website
  2. Middle office: this is where batch jobs are run for instance:
    1. managing a margin account: when you shorted shares, whose shares did you short. Did the stock move against you and cause a margin call?
    2. A stock split, what do we do? a ticker changed, etc
  3. Back office: this is the record keeper. Who is officially the owner of the stock? When a sale happens there needs to be a handshake: I just bought some shares, did the seller actually own those shares? This is similar to escrow in a house purchase.

So to your question: how does an order get executed?

  1. Front office takes buy order
  2. Sends it to the right exchange: each stock can only be on one exchange.
  3. Exchange matches order with a matching sale order. Might need to find multiple sale orders:
    1. This could be done by a computer
    2. Or a lot of people yelling at each other in a room
    3. etc
  4. the order matched, the exchange gives the broker a confirm
  5. the broker tries to get the actual stock from the seller(s)
    1. It used to be that you had to send the paper stock certificate
    2. now it goes through a clearing house
  6. three days later the order is cleared, and recorded as such in the back office
  7. Now you officially own the shares you intended to buy.

ETFs work the same since they are effectively shares of a mutual fund's assets. True mutual fund shares work differently since they don't get traded in the market. They get traded at the end of the market as just a bookkeeping exercise.

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  • ... with the major caveat that most brokers will most of the time not send your order to an exchange. If possible they will match it against other orders in their own retail order pool, and will skim profit off of both you and the counterparty.
    – dg99
    Commented Mar 31, 2014 at 23:31
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    I did not know that. It would seem that this would be a tricky thing to do. In my brokerage we had a two second guarantee for market orders. If the broker tried to fill a new order against another user's opposing order, wouldn't they need to cancel the other user's order on the exchange before they could fill it? Or perhaps the broker tries to do that, but if it fails the broker will take a position in the stock?
    – mlathe
    Commented Apr 1, 2014 at 17:57
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When you are placing an order with an online broker you should already know what exchange or exchanges that stock trades on.

For example if you look up under Yahoo Finance:

  • BAC - Bank of America - it shows it is traded on the NYSE
  • AAPL - Apple Inc. - it shows it is traded on the Nasdaq
  • CBA.AX - Commonwealth Bank of Australia - it shows it is traded on the ASX
  • NWS.AX - News Corp - it shows it is traded on the ASX
  • NWS - News Corp - it shows it is traded on the Nasdaq

Notice how News Corp is traded both on the ASX and the Nasdaq. The difference is the shares traded on the ASX have the extension .AX, that is how you know the difference between them.

When you are putting orders in with your online broker you will need to select the exchange you wish your order to go to (if your broker allows trading on multiple exchanges). So you should always know which exchange your order goes to.

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  • This is not entirely correct. Just because AAPL is listed on the Nasdaq does not mean that is the only place it trades. For example, AAPL trades on ARCA (NyseEuronext), BATS, EDGE, ISLAND (NasdaqOMX), etc. In theory you're supposed to be able to get the same bid/offer on every exchange, and in practice as @DumbCoder commented, your order will almost certainly be filled within your broker's order pool and will never actually reach an exchange.
    – dg99
    Commented Mar 31, 2014 at 23:28
  • @dg99 - NWS is traded on the ASX and on the Nasdaq and the bid/offer are not the same on the different exchanges. With all the brokers I have traded with and looked into trading with, they offer a selection for the exchange you wish to put your order in with, as per my answer above. There may be other brokers who operate differently, but this has been my experience.
    – Victor
    Commented Apr 1, 2014 at 3:02
  • Sorry, I was referring to USA markets. The whole point of RegNMS (despite its flaws) is to ensure that all US markets show essentially the same bid/ask for the same security at the same time.
    – dg99
    Commented Apr 1, 2014 at 18:03
  • @dg99 - well the OP has not Tagged a country, and a lot of people trade both markets in their own country plus markets in overseas markets. That is why brokers allow you to select which market you want to trade for your specific order.
    – Victor
    Commented Apr 1, 2014 at 20:40

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