- Most brokers and online brokerage firms advertise rapid trade execution. Despite this, slight discrepancies in time and also in price for different lots of shares can lead to an execution occurring at a different price than the investor thought that they were receiving for a certain batch of shares. The broker has many choices as to how they will execute the trade: They can send it directly to the exchange, to a market marker or third market maker, an electronic communications network (ECN), or they will internalize the trade.
- Internalizing the trade means that the broker sells shares directly to the buyer from its own accounts, often profiting from the difference between the prices it offers and those on the market. Brokers have a responsibility under the law to provide their customers with the best, most efficient execution available. A market maker is a third-party firm that quotes a buy-and-sell price to the trader. ECNs match orders with the opposite side of the deal electronically and in some cases automatically. If the trade is sent directly to the exchange in question, it will be handled automatically by the computer network there.
- A stock exchange is just a common market that connects buyers and sellers of stocks. In the past, these exchanges were more tightly tied to geography than they are now. Although most exchanges are still physical places, inexpensive phone communication and online order execution have made them relatively obsolete. Information technology has enabled far larger trading volumes than could have ever been supported in the past.
- Despite all the changes in the stock market, executions are still not instantaneous, although in some cases they can occur in less than a second. The continued delay in stock trading is partly caused by SEC regulations of the industry that prevent further development in the area of creating more rapid execution. In addition, some brokerage houses and market makers make a profit on the spread between a buy order or sell order and the market price, increasing resistance among many to increase execution speeds.
- The modern stock-trading system enables rapid stock trades among investors from around the world on multiple exchanges with few hard and fast barriers. The growth in online brokerage firms has also greatly reduced the reliance on human stock brokers for trading. These automated brokerage systems essentially allow people to act as their own stock brokers, reducing the cost and barrier to entry for investors.
