Where Does My Order Get Filled? Taking Stock of the U.S. Market

You’ve done your research, and you’re ready to buy or sell that stock, option, or fund. You log in to your account, cue up an order ticket, and blast it out. A few seconds later, a fill is reported back to you and the money is automatically squared up in your account. How hard was that?

You’d be surprised. Behind the seeming simplicity of today’s trading platforms—from a user experience standpoint, anyway—is a complex web of exchanges, order execution, clearing facilities, and other intermediaries ensuring orders get filled at the best possible price and that the funds are transferred and settled properly. Plus, there are regulators enforcing the rules and helping ensure nothing falls through the cracks.

So, where and how did that order get filled? These days, it depends.

The Evolution of Markets   

Once upon a time, the world’s financial markets consisted of small, regional exchanges whose hours depended on the whims of local merchants. And getting cross-border price information in any semblance of real time was next to impossible.

Today, thanks to technology, you can follow financial markets around the globe as you follow the path of the sun. However, there’s one market that dwarfs all others by far in terms of both market capitalization and average trading volume: the U.S. financial market. According to data compiled from exchange volume as of December 2020, the United States makes up about 54% of the world stock market.

The U.S. market is not a monolith, though. So, when you place an order to buy or sell a stock, index, exchange-traded fund, or options order, depending on the product and prevailing price, your order might get filled at any number of places, including exchanges and order-crossing networks. 

As an investor, should that execution venue uncertainty be a concern? Far from it, and the answer lies in these four letters: NBBO. That’s short for the National Best Bid and Offer—a regulation from the U.S. Securities and Exchange Commission (SEC) that requires each trade be executed at the best available price. If you’re buying, that means you’re buying at the lowest available offer. If you’re a seller, you’re selling at the highest prevailing price.

And who might be taking the other side of your order? It might be a market maker using arbitrage to exploit a price inefficiency, a speculator, or a fund manager. See figure 1 for a look at the main players.

The Players: Stock Exchanges & More

Here are some platforms that make up the trade execution ecosystem:

New York Stock Exchange. The NYSE is the world’s largest stock exchange—based on the market capitalization of listed stocks, which as of December 2020 stood at $26.23 trillion, according to exchange data. The NYSE uses market makers and specialists to facilitate trading by publicly quoting buy and sell prices during regular trading hours. (Specialists fill their own orders; market makers fill orders for themselves and the public.) Since 2013, the NYSE has operated as a subsidiary of the Intercontinental Exchange (ICE).

Nasdaq Stock Market. Originally called the “National Association of Securities Dealers Automated Quotations,” the Nasdaq was the world’s first fully electronic stock exchange, meaning there were no floor traders (as on the NYSE) and all trades were executed “over the counter.” The Nasdaq—a subsidiary of Nasdaq, Inc. (NDAQ)—is the world’s second-largest stock exchange and uses only market makers to facilitate trading. Both the NYSE and Nasdaq have regular trading hours, from 9:30 a.m. to 4 p.m. ET.

Dark pools. The name may sound ominous, but dark pools are simply private exchanges for trading securities. They’re only “dark” because these exchanges aren’t accessible to the public, so there’s no transparency about the transactions. Dark pools were designed to accommodate block trades—generally considered to be 10,000 or more shares of stock—by large institutions that didn’t want the size of their trades to negatively affect their execution price.

Internalizers. These are very large entities with their own inventory of shares to pull from for trading with clients. An internalizer may be anything from a large market-making firm to an investment bank to a hedge fund. If a client wants to buy 50,000 shares, these entities can “internalize” the trade from inventory instead of going to the public market to get the shares for the client. 

Equity options markets. In 1973, the Chicago Board of Trade—then the largest global futures market (and now part of derivatives conglomerate CME Group)—founded the Chicago Board Options Exchange (CBOE), which ushered in a new era of listed options (puts and calls) on U.S. stocks. Now Cboe Global Markets (CBOE) is the largest of several U.S. options exchanges. It also owns BATS, an all-electronic stock and options exchange, and the Cboe Futures Exchange, which lists volatility contracts, including the flagship Cboe Volatility Index (VIX). Rival exchanges include those owned and operated by Nasdaq and ICE’s NYSE division. 

Futures and options. Stock index derivatives are also listed on U.S. futures exchanges, led by CME Group (CME), which owns the Chicago Mercantile Exchange, Chicago Board of Trade, NYMEX, and COMEX, among others. Listed products include futures and options on the S&P 500 Index (SPX) and other top indices, as well as futures on energy, interest rates, metals, agricultural commodities, foreign exchange, and a more recent addition, cryptocurrencies.

The Bottom Line on Order Execution

When looking at the complex jungle of exchanges and other order execution venues, it’s easy to get the idea that it’s all too much. But it works. Modern markets tend to be deep, liquid, and competitive—arguably more so than ever.