| Investors often deal in stocks through online trading | | | | intervention. |
| accounts. Here, they have an option of executing an | | | | Order to Third Market Maker |
| order just by a click of a button. However, the | | | | A broker can also direct a stock order trading in an |
| execution of this order is not instantaneous. There is | | | | exchange to a third market maker. Third market |
| a process that is involved after the order is placed | | | | makers pay broker an incentive to direct orders. |
| by the investor. This is known as order execution. | | | | Also, the broker may not be a member of the |
| There are different ways by which an order placed | | | | exchange in which the order was to be executed. |
| can be filled and there may be different time delays | | | | Internalization |
| associated with them. The time and place where an | | | | Sometimes a broker fills stock orders from the |
| order is executed affects the cost of transaction and | | | | inventory of stocks from the brokerage firm. This |
| the price paid for the stock. | | | | leads to fast execution as well as money earned by |
| Some investors assume that the online brokerage | | | | the brokerage firm. |
| firms are directly connected to the stock exchange. | | | | Electronic Communications Network (ECN) |
| However, the order executed by an investor goes to | | | | ECNs are online systems that can automatically |
| the broker first. The broker then decides on how the | | | | match buy and sell orders. This is more appropriate |
| order should be executed. In a fast-paced stock | | | | for limit orders and leads to fast execution of orders. |
| exchange, the prices of the stocks change | | | | Order to Market Maker |
| continuously. Hence, the investor may see a | | | | The broker can direct an order to the market maker |
| difference in the price when the order is placed and | | | | in charge of the stock for over-the-counter (OTC) |
| when it is actually executed. SEC regulations do not | | | | exchanges, such as the NASDAQ. This leads to |
| set a time limit on any order execution. However, a | | | | timely order execution. Also, the broker may earn |
| brokerage firm has the duty to make the investors | | | | additional money by directing the order to a market |
| aware of all the real facts about order execution. | | | | maker. |
| This is because just as an investor can choose a | | | | Brokers must provide investors the best possible |
| broker, a broker has a choice of markets to execute | | | | order execution. However, it does not always happen |
| the order. | | | | as the broker may direct the order otherwise to |
| Order to the Floor | | | | earn additional money. Rules enforced by SEC since |
| A broker can execute the order on the floor of | | | | 2001 obligates brokers to report on the quality of |
| exchanges such as the New York Stock Exchange | | | | order execution. This also has penalties on the broker |
| (NYSE) or to a regional exchange. Regional exchanges | | | | if he overrules the laws. SEC requires brokers to |
| pay a privilege fee to a broker for an order | | | | notify investors if orders are not directed for best |
| execution, known as payment for order flow. This | | | | execution. |
| may delay the order execution as it is through human | | | | |