how orders get executed
best execution and broker obligationsby law brokers are obligated to give each of their investors the best possible order execution 1 there is however the debate over whether this happens or if brokers are routing the orders for other reasons like the additional revenue streams we outlined above let s say for example you want to buy 1 000 shares of the tsj sports conglomerate which is selling at the current price of 40 you place the market order and it gets filled at 40 10 that means the order costs you an additional 100 some brokers state that they always fight for an extra one sixteenth but in reality the opportunity for price improvement is simply an opportunity and not a guarantee also when the broker tries for a better price for a limit order the speed and the likelihood of execution diminishes however the market itself and not the broker may be the culprit of an order not being executed at the quoted price especially in fast moving markets it is somewhat of a high wire act that brokers walk in trying to execute trades in the best interest of their clients as well as their own but as we will learn the sec has put measures in place to tilt the scale toward the client s best interests the sec has taken steps to ensure that investors get the best execution with rules forcing brokers to report the quality of executions on a stock by stock basis including how market orders are executed and what the execution price is compared to the public quote s effective spreads in addition when a broker while executing an order from an investor using a limit order provides the execution at a better price than the public quotes that broker must report the details of these better prices 1 with these rules in place it is much easier to determine which brokers get the best prices and which ones use them only as a marketing pitch additionally the sec requires broker dealers to notify their customers if their orders are not routed for best execution 1 typically this disclosure is on the trade confirmation slip you receive after placing your order unfortunately this disclaimer almost always goes unnoticed execution and dark poolsdark pools are private exchanges or forums that are designed to help institutional investors execute their large orders by not disclosing their quantity because dark pools are primarily used by institutions it is often easier to find liquidity to execute a block trade at a better price than if it was executed on a public exchange such as the nasdaq or new york stock exchange if an institutional trader places a sizable order on a public exchange it is visible in the order book and other investors may discover that there is a large buy or sell order getting executed which could push the price of the stock lower most dark pools also offer execution at the mid point of the bid and ask price which helps brokers achieve the best possible execution for their customers for example if a stock s bid price was 100 and the asking price was 101 a market order could get executed at 100 50 if there was a seller at that price in the dark pool main street is generally skeptical of dark pools due to their lack of transparency and lack of access to retail investors example of executionsuppose olga enters an order to sell 500 shares of stock abc for 25 her broker is under obligation to find the best possible execution price for the stock he investigates the stock s prices across markets and finds that he can get a price of 25 50 for the stock internally versus the 25 25 price at which it is trading in the markets the broker executes the order internally and nets a profit of 125 for olga 