Online Broker Trade Executions and Order Routing
Many online and direct access stockbrokers & futures brokers advertise and highlight their speed of execution for trades but do you really understand what this means and how it can affect your trading? Frankly, the time it takes when you press "Confirm" to execute your trade, to the time your broker receives it, is on average in the order of milliseconds and hardly significant, even though you may be on the other side of the globe. This is hardly the key issue here, unless of course you have severe bottlenecks in your internet connection which is impeding your trading order entry.
Fast Markets and its Effects on Trade Execution
The more important issue at hand is that investors and traders must understand that the speed of trade execution does not guarantee where your trade is executed i.e. at what price you eventually get filled for your stock or any other trading instrument. Stock and Futures Markets can move fast and the quotes you saw on your screen a couple of seconds ago may be stale and not reflective of the current market. Your execution will then primarily depend on if there is a counter-party willing to take on the opposite side of your trade at the price specified by you. What you have to especially take note of is how the trade is handled by your broker after it is received.
SMART Routing and Best Execution
A beginner stock market investor may think that the Nasdaq technology stock that he just bought or sold was physically transacted in the Nasdaq Stock Exchange, but this may not normally be the case. There are numerous other places where one could have bought or sold this stock and most often than not, this is not evident to novice investors and traders. How and where your broker executes the trade can have an impact on overall transaction costs and ultimately how much you pay for a stock.
When you execute an online trade from your broker's website or order entry frontend, what you are essentially doing is sending an order to your broker, and your broker can decide where to send it for execution. Reputable online discount brokers like Interactive Brokers, have very flexible trade execution and routing options for the investor and trader to choose how they want the broker to handle each trade. For example, in the case of Nasdaq listed stocks, the trader has the option to send his order directly to Nasdaq market makers via "SuperSOES" or the various Electronic Communication Networks (ECNs) like Archipelago, Instinet and Island. The trader also has an option to choose the "SMART" routing execution mode which allows the broker to automatically decide which route to choose with the intent of "best execution" or executing the trade at the best possible price for the customer.