How Trading Works: The Life of a Trade

In The U.S. Equities Market

Pre-Trade:

News, tips, technical analysis, and/or discussions about what stocks to buy or sell.

Investors evaluate their investment positions and strategies based on news, corporate actions, a financial advisor’s recommendations, technical analysis, or word-of-mouth from other investors.

Initiate a Trade

Contact financial advisor, broker or independently research stocks.

Investors begin the process of placing an order to buy or sell a stock by discussing strategies and options with their financial advisors and/or brokers, or by reviewing reports and news regarding the stock.

Place an Order

The broker enters an order.

Brokers enter orders into their order management system, or investors enter orders themselves through their online brokerage accounts. An order includes the stock name (aka "ticker"), a buy or sell indicator, the number of shares, and sometimes a limit price (an investor-designated maximum/minimum execution price), or other order handling instructions (See Cboe Exchange Rule Book for additional information on order types). An example would be: Buy 100 shares of MSFT at a limit price of $28.82. The investor has specified that he/she will not spend more than $28.82 per share.

Order Goes to an Exchange

The order is sent to interact with other orders at a marketplace.

These orders are sent across secure connections to electronic exchanges such as Cboe, the New York Stock Exchange and Nasdaq to execute with orders that were placed by other investors. U.S. exchanges are interconnected, so no matter where an order is initially sent, it will be routed to the marketplace with the best price.

Trade Is Executed

The order is paired at the exchange with another order to make a trade.

  1. Orders are paired with matching orders from other investors to buy or sell the desired amount of securities. All orders resulting in trades are required by the SEC to be executed at the best possible price for both sides of the trade.
  2. When a trade is executed, individuals are charged a fee from their brokers
  3. Depending on whether the broker added or removed liquidity, the broker will receive a rebate or be charged a fee from the exchange for executing the order.

When a broker adds liquidity to a market, that means he/she has added a buy or sell order to an exchange order book. If a broker removes liquidity, that means he/she has executed against a buy or sell order that was resting on an exchange order book, thus removing the order from the market.

Trade Information Is Sent to Clear and Settle

Trades are confirmed and money is transferred.

All trade information is sent to the National Securities Clearing Corporation (NSCC) in real time. The NSCC processes and records all trades, issues a summary to brokers and sends instructions to the Depository Trust Company (DTC) to settle and process money transfers. The DTC electronically transfers ownership of the securities between the buying/selling brokers’ accounts. Finally, the broker/dealers’ settling banks send funds to or receive funds from the DTC to complete settlement. Settlement occurs three days after the trade occurs.

Post-Trade

Trade notification reaches the investor.

Investors are notified of the trades by their brokers or via their Web accounts immediately.