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 Online Brokers have many different avenues where they can execute your trades. In the case of stock brokers offering trading in Nasdaq stocks, they are able to route orders to Market Makers, Electronic Communications Networks (ECNs) like ARCA, INET & REDI and regional exchanges like the Pacific Exchange (PCX).
Order Routing Options Available To Brokerages
How the broker determines which way to route customer orders very much depends on what kind of orders are placed by the customer. If lets say a customer places a limit order to buy 1000 shares of MSFT at $27.50, the broker has the option to either place a limit order at one of the ECNs, send the order to a "third market maker" who pays for orders to be routed to them or fill the order internally using the brokerage's own inventory. It must be noted that brokers have the duty to obtain the best execution for the customer, so in this case, if MSFT trades below $27.50, your order will be filled at $27.50 or lower i.e. you pay the same or less for the stock than you originally intended to.
Lets consider each of the above 3 options further:
Electronic Communications Networks
 When the limit order is placed in one of the ECNs, the order will shown in the stock's order book and will be visible to all participants trading this stock. The way that this order is going to be filled is that someone comes and hits the bid or lower with a number of shares equal to or higher than what is at the bid. There is little chance of price improvement for this scenario.
Third Market Maker & Payment For Order Flow
If the order is sent to a "third market maker" who pays for order flow i.e. he pays for orders to be routed to him, then the market maker will decide if it is worthwhile for him to take the trade. These market makers normally make their profits from the spread so if this market maker fills your order, he is either selling from his own inventory that he bought at a lower price or he is getting "short" in order to buy it back at a lower price.
Internalization Using SMART Routing Technology
 The third option is internalization in which the broker can send the order to a different division within the firm to fill the order. An excellent example of this is the relationship between Interactive Brokers (IB) and Timber Hill (TMBR). TMBR makes markets in a variety of trading instruments while IB is a deep discount brokerage in stocks, futures, options etc. Using IB's SMART routing technology, orders are routinely routed to TMBR to see if it can be executed there before proceeding elsewhere.
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