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In the United States, whenever a customer places an order, will the broker always execute that trade on the market?

Do brokers just maintain a "reservoir" of popular stock, and hand them out to customers at market price instead of going to the exchange?

In other words, do people ever just buy/sell assets from their broker, instead of through their broker?

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  • See also this question. I don't think it's an exact duplicate, though if that question had better answers it might be close enough.
    – Joe
    Dec 1 '15 at 21:44
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    See this answer regarding dark pools. Most brokers now either run their own dark pool or subscribe to a larger institution's dark pool, such that they can fill your order in whatever way makes them the most money. If you use a broker nowadays it is exceedingly rare for your order to make it to a lit exchange.
    – dg99
    Dec 1 '15 at 23:04
  • Relevant article from the SEC: Trade Execution: What Every Investor Should Know
    – Flux
    Apr 10 at 16:22
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In the United States, whenever a customer places an order, will the broker always execute that trade on the market?

Not necessarily. For stock options, yes. For stock, they may be sent to an exchange or stock market for execution or they may be traded against another customer's order, against the orders or quotes of an affiliated market maker, or the broker's own account. Whatever happens, the broker is obliged to provide "Best Execution" and one of those things is ensuring that the customer does not pay more than the currently displayed National Best Bid or Offer (NBBO).

Do brokers just maintain a "reservoir" of popular stock, and hand them out to customers at market price instead of going to the exchange?

Unlikely as they are bound to provide the customers the stock at the NBBO or better, and as the stock price fluctuates they would be subject to risk. However that is not to say they might try to match customer orders against each other, and many brokers participate in "Dark Pools" (effectively non-displayed markets) that can be used to try match up orders instead of sending them to the exchange or stock market.

In other words, do people ever just buy/sell assets from their broker, instead of through their broker?

It is not that common, but yes, it can happen.

Whatever they do, the broker is required to record all of the things that happen to your order (Reportable Order Events) to the Financial Industry Regulator (FINRA) through their Order Audit Trail System (OATS) on a daily basis, which can help to keep your broker honest.

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There are two terms that are related, but separate here: Broker and Market Maker. The former is who goes and finds a buyer/seller to buy/sell shares from/to you.

The latter (Market Maker) is a company which will agree to partner with you to complete the sale at a set price (typically the market price, often by definition as the market maker often is the one who determines the market price in a relatively low volumne listing). A market maker will have as you say a 'pool' of relatively common stock (and even relatively uncommon, up to a point) for this purpose.

A broker can be a market maker (or work for one), also, in which case he would sell you directly the shares from the market maker reservoir. This may be a bad idea for you - the broker (while obligated to act in your interest, in theory) may push you towards stocks that the brokerage acts as a market maker for.

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