How Your Buy and Sell Orders Get Filled
by Chris Nagy and Charles Rotblut, CFA
Christopher “Chris” Nagy is the managing director of order routing, sales and strategy at TD Ameritrade.
I spoke to him recently about the process that occurs at the brokerage firm after an investor places a stock trade.
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Charles Rotblut, CFA
Charles Rotblut (CR): Let’s start with the basics. An investor logs on to TD Ameritrade’s website to place a stock order, and they click “Buy” or they click “Sell.” What happens from that point to the time they see the trade confirmation on their screen?
Chris Nagy (CN): Most investors, and in fact a lot of people in the financial markets, believe that stocks either trade on the New York Stock Exchange or the NASDAQ Stock Market. The reality is far different from that fiction. Today there are over 40 different dark places—or 40 different execution venues—in the marketplace where trades can and do occur, and prices between those venues are changing very quickly.
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Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/charlesrotblut.
Discussion
No discussion was raised about the vulnerability of a stop order to the marketplace. For example, a stock I own, XYZ, is trading at $20 a share and I place a stop loss order for 100 shares of XYZ at $16 to lock in profits or limit loss. At the same time, another person places a buy limit order for 100 shares of XYZ also for $16. Will my $16 stop loss order be executed during the nano-second no other buy/sell orders are open and because it matches the limit buy order of the other person?
posted about 1 year ago by Richard from Florida
Why are bid/ask sizes of highly liquid stocks usually in the single digits when most trades take place in lots of 100?
posted about 1 year ago by Chipper from New Jersey
In that case the single digits represent the number of lots, not shares.
posted about 1 year ago by Leonard from New York
Excellent information; has cleared up some confusions that I had about how limit orders worked.
posted about 1 year ago by Chris from California
Richard...
That would imply an 8 dollar spread during trading hours ($4 above and below market.) That's really illiquid. Plus someone else would actually have to sell at $16 before your stop loss would be activated by the print.
posted about 1 year ago by Timothy from Nebraska
It seems that the trader/specialist that can see the stop-loss prices has the keys to the kingdom in terms of getting advantageous prices. Who has the ability to see stop prices. They do not show up on retail level1/level2 screens.
posted about 1 year ago by Fred from Oregon
Absolutely no disrespect intended for a well-intentioned & quite informative article by these two professionals.
I also do not want to 'feed' some 'conspiratorial' feeling that retail investors get short shrift, etc.
The whole securities industry is literally built around the premise that the average 'retail' customer is treated with 'kid gloves' and not to be hosed ... for all the proper ethical reasons but also self-interest ... no one wants the heavy, generally misplaced, hand of 'regulators' to enter the picture and make everyone's life more complicated ... and ultimately do a 'spit' worth of little to improve the practical treatment of the retail customer.
The above all said, and it is all largely true, in today's world with trade execution margins so razor thin, the plain economic realities are that that 'last' order to get any attention will be your average retail account. One can cry & scream all they want but this is the economic reality.
Second, in my humble estimation, the concept of 'stop-loss' orders, in the present environment, borders on delusion & naivete. Yes, if the market is stable, you might get to achieve your goal ... .but do not overreach in your rational expectations.
These orders come up so fast and are aggregated en masse that the 'fill' is a quite logical & rational exercise .. that just may not fit the average retail investor's expectations. You have internal clearing before you go outside and then there are the 'dark pools, etc. The world is not what is was 10, 20, or 30 years ago.
I've found that most firms are really quite good, professional & helpful with order fill ... but you cannot delude yourself that you are the 'prioirty' customer and will get a tough 'execute' for literally pennies ( on a daily devaluing US$ no less) on the dollar.
Point: be realistic and almost cynical ... in a stable market you may get what you want on a stop/loss order. After that .... well, in a turbulent market you will get a turbulent result as a retail account. That is reality.
posted about 1 year ago by Charles from Connecticut
Ok thanks everyone,
but i'm not getting my order quantities filled entirely on CEF's or thinly traded issues.
When I have used an "all or none" stipulation, sometimes I don't get filled, even at a better price. So how do you correctly apply the "all or none" and is it a useful tool ?
al hilditch
posted about 1 year ago by Al from Pennsylvania
Having thought that I had a handle (ha ha) on how this works I consistently used stop loss orders on investments until several occasions when my stop executed and then the price went back up above my purchase price, effectively handing me a loss for all my good intentions. The result was that I decided to cease active trading until I figured out was I was doing wrong. Now I just buy and hold stocks with good dividends and forget growth, which has cost the industry a few commission bucks and saved my temper.
posted about 1 year ago by James from California
I used to use a lot of stop/limit orders to mitigate my losses and sell limit orders to take predetermined gains until....May 6, 2010. The unintended results and whip-sawing that I experienced made me rethink all of this. I now recognize that stop loss orders are nothing more than an offer to sell my valuable securities to someone else at a large discount!
posted about 1 year ago by Thomas from Wisconsin
To Thomas from Wisconsin:
If you no longer use stop loss orders, how do you protect yourself from a sudden drop in price? I have tried using trailing stops but have also been burned when a fluke trade drops the price below the stop and executes a market order at an unreasonable loss just before the price returns to the average trading range. I liked your comment about stop loss orders advertising your willingness to sell your valuable assets for a large discount.
posted about 1 year ago by Joel from Pennsylvania
is there any legal recourse for this electronic debacle? i had no intention of selling apple, but placed a stop 20% below the price on that day one year ago. we all know the price now. how were some trades cancelled?
posted about 1 year ago by Steve from California
I dont use stop limits anymore either, because other people will see my order and try to manipulate the bid/sell orders so that my order gets triggered and then market immediately go back up. I think that no one should be able to see the orders other than people facilitating the orders. That way no manipulation can occur...everyone would be at the same advantage.
posted about 1 year ago by Maurice from Missouri
Fidelity offers a private order book into which you can enter conditional trades, including a multiple contingent trade, where you can specify volume, which protects you from getting pushed out of a position on small volume.
posted about 1 year ago by Jane from California
To put the market that retail investors are exposed to in perspective, a couple of questions:
1. About what percentage of daily volume is due to the retail trader?
2. What advantage(s) do institutional traders enjoy that retail traders have no access to? In other words, how unlevel is the playing field in buying and selling stocks on exchanges?
posted about 1 year ago by Ted from California
This article, while informative, again stresses the importance of "caveat emptor"-Let the buyer(or seller) beware.
There is no even playing field when it comes to knowledge about stocks or the stock market and no amount of regulation could make it so! Every person has different amounts of knowledge about different things and to think an amateur can know as much as a horde of seasoned (and sometimes ruthless) professionals is naive to the extreme.
Would you play football against Ray Lewis or Tom Brady even if there was an even playing field? Do you think you'd win? If not, then why are you actively trading stocks?
Do the smart thing and decide to buy individual stocks you don't plan on selling for a long time (decades) or decide to buy funds (ETF's or index are the best value) and hold them.
Brokerages encourage trading-that's how they make their money. They don't care whether any of the traders make money-most probably don't!
posted about 1 year ago by Mark from Illinois
Trading stocks is not anywhere similar to playing on the a sports team. Remember,your side probably also has many profession traders on it too. The timing aspects can let you change quit the game at almost anytime and even switch sides or play both sides at the same time. How many sport teams do you know allow that? Maybe it happens in Chicago with mob betting in the background.
posted about 1 year ago by Mark from Illinois
I have recently started trading on the TD Amitrade Think or Swim platform. TOS allows having both a paper trading account as well as a live account. Entering the same trades on both platforms has given me an appreciation for the factors affecting execution. Nearly ideitical trades entered in succession can end up with one being executed and the other not.
I have been entering orders that include what TOS calls an OCO close braket. That is an opening limit order plus two close orders. One a stop loss and the other a sell at traget, sell for profit, price. OCO means that neiter order is entered but the first to hit its limit price will execute and the other will be cancelled. (OCO, One Cancles Other).
I find that sell orders with identical instructions will sometimes be executed in one system and not the other.
posted 10 months ago by Glen from Massachusetts
Since May 11 the market was a no man's land for me. I feel much as Al from Penna ,..James from Calif. .and Thomas from Wisc. I'am waiting for Micro metals to bottom as a sector and securely head upward so i can fish the. Rolling -or Channeling them as i have done in the past to double my 401 in 4 years when the markets were allowed to rise with little manipulation. Read the news about AVL and REE to learn of the interfering manipulation from Asia!!! I'am watching LNG as a sector, and Nuc's ..UEC etc. I need to sharpen my focus, ..there's always a MUX-BRD-JAG ZN to watch for. That Markets gonna give me a paycheck somehow!!! PL
posted 10 months ago by Paul from Pennsylvania
I've been told that most retail orders are filled by specialists or market makers, adding the spread to their commission. Now I see why the spread becomes more important as it increases.
posted 10 months ago by Ted from California
Does the above also apply to options? For example, do options (e.g. calls, puts)also use market makers, specialists?
posted 10 months ago by Fred from Colorado
Very good article. I have used both market and limit but it is always good to reenforce the principles.
posted 7 months ago by Ron Jamison from Texas
