Investors make millions of online stock trades each day. But have you ever thought about how online stock trading works? Once you hit enter on an order to buy or sell a stock, what happens next? There might be more steps in the stock trade process than you realize.
Many investors who trade through online brokerage accounts or mobile apps assume the next stop after placing an order is a direct connection to the securities markets. Not quite. When you enter an order to buy or sell securities, your order is sent to your brokerage firm, which in turn decides which market to send it to for execution.
Here are five key steps in the online stock trade lifecycle:
STEP ONE: You place an online stock order.
Let’s say you use an online account or a mobile app to buy 25 shares of XYZ Inc., a publicly traded, exchange-listed company.
STEP TWO: The order goes to your retail brokerage firm.
The firm reviews the order against legal, regulatory and compliance obligations as well as any policies specific to the brokerage firm. Then the firm determines how to best execute your order.
STEP THREE: The firm determines how to execute your order.
The firm either executes the order itself or sends it to one of three places for execution:
- Exchange – Exchanges are the traditional marketplace for trading securities. Exchanges quote current bid and ask prices—the prices a buyer and seller are looking to receive.
- Alternative Trading System (ATS) – An ATS is a non-exchange execution venue where buyers and sellers can trade stocks, including, in some cases, those not listed on exchanges.
- Wholesale Broker-Dealer – A wholesale broker-dealer may execute an order itself, often buying and selling securities for and from its own inventory, or it may route the order to another venue for execution.
STEP FOUR: Your trade is executed.
Most retail customer stock orders are executed without an issue. However, if your firm is unable to find a buyer or seller to meet the terms of an order, the trade might be filled partially or not at all. This is more likely when placing certain order types, like stop or limit orders, or placing an order for a large number of shares or in a less frequently traded stock.
In other instances, a trading pause or halt might result in an order not being executed. These events are relatively rare.
STEP FIVE: You receive an electronic confirmation.
For the online stock order placed above, the electronic confirmation might read: “You bought 25 shares of XYZ Inc. for $10 a share, for a total cost of $250. The shares will appear in your account within one business day.”
If applicable, a commission and/or other fees will be included in the confirmation total.
All of the information about your trade goes to a clearing firm. A clearing firm is responsible for clearing and settling trades. That means it verifies that the terms between the buyer and a seller match up (i.e., that the data from both parties indicate the same price, number of shares and total proceeds).
The clearing firm has one business day to match and settle the trade, which means the shares are formally moved from the books and records of the brokerage firm of the seller to those of the brokerage firm of the buyer, and funds reflecting the purchase are moved from the buyer’s account to the seller’s account.
THE STOCK TRADE PROCESS IS COMPLETE.
Continuing with the same order described above, you now own 25 shares of XYZ Inc.
In most cases, your brokerage firm is required to provide you with quarterly account statements, as well as notification of trade confirmations following each transaction. Always review these documents carefully—and immediately contact your firm or financial professional about any transaction or entry you don’t understand or didn’t authorize.
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