Trade Execution

What is trade execution?

Trade execution refers to fulfilling an investor’s buy or sell order for stocks in financial markets. Trade execution is one step in the trade lifecycle that sees investors submit a buy or sell order to brokers, who then determines where to send the order and how to get the best possible price for buyers.

Investment professionals use investment portfolio management software to track and manage clients’ portfolios. These tools have the technology to handle investments like stocks, bonds, mutual funds, and exchange-traded funds. Advisors and investment professionals can use them to maintain and aggregate all relevant client data to provide a holistic view of investment activities.

Methods of trade execution

Brokers execute orders in various ways upon receiving them. Some of the standard methods of trade execution include:

• Order to the floor. When trading stocks on large exchanges such as the New York Stock Exchange (NYSE), a broker might direct the order to the exchange's floor. Traditionally, this occurred on physical trading floors where traders would shout orders to one another. It often happens electronically today.
• Market maker. Market makers are financial firms that buy and sell securities at publicly quoted prices. Brokers can send an order to a market maker instead of directly to the market. They’re vital in maintaining orderly and fair trading between buyers and sellers. 
• Electronic communications network (ECN). Brokers sometimes route buy and sell orders to an ECN. When a broker routes an order to an ECN, computers match the buy and sell orders electronically.
• Internalization, or inventory of securities. Some brokers hold an inventory of stock. In these instances, they may decide to execute orders in-house. 

Trade execution in the trade lifecycle

The trade lifecycle is a step-by-step process for executing financial trades. Specific steps in the trade lifecycle may vary depending on the type of trade and the institution, but in general, the core stages involve:

• Pre-trade. During pre-trade, investors typically work with analysts, portfolio managers, and other key stakeholders to develop and evaluate trade ideas. A thorough pre-trade stage considers market conditions, risks, regulatory compliance, and alignment with the overall investment strategy. Teams generate trade ideas, seek approval from necessary stakeholders, and translate orders for proper routing and execution. 
• Trade execution. At this stage, investment banks take action on approved trade orders, and buy or sell on behalf of their clients. They may also take action on approved orders for their accounts. During execution, they determine trade prices and match orders with the appropriate counterparty on the other end of the deal. Once executed, both parties receive a confirmation with trade details. 
• Trade clearing. This phase captures trade details in an organized and standardized format. To prepare for settlement and assessing risks, clearing determines and verifies the exact details of a transaction.
• Trade settlement. The official exchange of financial instruments and funds between buyer and seller occurs during trade settlement. Both parties complete the necessary transactions to achieve the value exchange, resolving discrepancies or errors to ensure a timely and complete trade. The transfer of funds and securities takes place on a date previously determined by both parties.
• Position and risk management. Following trades, investment banks continually monitor and analyze their positions in addition to market and operational risks. Banks are also required to provide reports on trading activities for compliance. Adequate recordkeeping is crucial for portfolio management. 

Is trade execution immediate?

Trade execution takes time. Brokers receive buy and sell orders from investors, and then decide which market to send the order to for execution. Even when a trade moves quickly, investors may not receive the price they shared with their broker or vice versa, as market conditions affect stock price.

What is the best execution rule?

The Financial Industry Regulatory Authority (FINRA) is a government-authorized, self-regulatory organization that oversees brokerage firms and exchange markets in the United States. Brokers and firms must register with FINRA to execute deals on behalf of their clients.

According to FINRA Rule 5310, aka the best execution rule, brokers must “use reasonable diligence to ascertain the best market for the subject security.” Brokers are responsible for finding favorable pricing for their customers. FINRA uses several factors to determine whether a broker used “reasonable diligence,” including the character of the market, transaction size, total number of markets checked, accessibility of quotation, and terms and conditions of the order. All of these factors are outlined as part of Rule 5310.

Investors need to understand their risk tolerance when managing investment portfolios.