ALSO SEE: Best execution
A trade can be executed in a variety of ways. Where and how an order is executed can affect the overall cost of the transaction, including the price paid for the stock. Investors who trade through a broker do not have a direct connection to the securities markets. Their order is sent over the internet to the broker, who decides which market to send it to for execution. The same process happens when someone calls his or her broker to place a trade.
A broker generally has a choice of markets to execute customers' trades:
- For listed stocks, the broker may direct your order to the NYSE or another exchange or to a "third market maker," a firm that stands ready to buy or sell listed stocks at publicly quoted prices. Some exchanges and third market makers practice "payment for order flow" in which they pay your broker to route your order to their exchange or venue.
- For over-the-counter (OTC) stocks such as the Nasdaq, your broker may send the order to a "Nasdaq market maker" in that stock. Many Nasdaq market makers also pay brokers for order flow.
- The broker may route your order – particularly if it is a limit order – to an electronic communications network (ECN) that automatically matches it at a specified price.
- The broker may internalize your order, that is, send it to another division of the brokerage firm to be filled out of the firm's own inventory. The broker's firm may make money on the difference between the purchase price and the sale price (the "spread").