Trade Execution
Definition:
Trade execution is the process of completing a financial transaction between two parties, known as buyer and seller, by exchanging ownership of a specific asset at a specified price and time. It involves the following steps:
1. Order Placement:– The buyer or seller submits an order to the exchange or broker, specifying the asset, quantity, price, and order type (market, limit, etc.).
2. Order Routing:– The exchange routes the order to the appropriate market maker or liquidity provider.
3. Price Discovery:– The market maker searches for matching orders, and the price of the asset is determined based on the best bid and ask.
4. Order Fulfillment:– Once a matching order is found, the exchange executes the trade and confirms the transaction details to both parties.
5. Payment and Settlement:– The buyer pays the seller, and the seller delivers the asset to the buyer.- Payment and settlement typically occur through a third-party clearinghouse.
6. Confirmation:– The exchange sends confirmation of the trade to the buyer and seller, outlining the details of the transaction.
Types of Trade Execution:
- Market Order: An order to buy or sell an asset at the best available price.
- Limit Order: An order to buy or sell an asset at a specified price or better.
- Stop-Limit Order: An order to buy or sell an asset at a specified price limit, or at a stop price if the market reaches that level.
- Stop Order: An order to sell an asset if the price reaches a specified stop price.
Example:
A trader places an order to buy 100 shares of Apple stock at a price of $100. The exchange routes the order to a market maker, who finds a matching order at $102. The trade is executed, and the trader buys 100 shares of Apple stock at $102.
Key Factors:
- Market conditions
- Order book
- Liquidity
- Price discovery
- Execution fees
- Settlement procedures
