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