Definition
The term execution refers to a transaction that completes buy or sell orders for a security or futures contract. The execution of an order is typically facilitated by a third party, such as a broker.
Explanation
While the speed of execution might make it appear that investors have a direct connection to a market or exchange, the buy or sell order is executed by a third party. In fact, brokers have some latitude when determining how to complete an order. However, a broker is also bound by their duty of best execution, which means they must determine what will be the most favorable terms of the trade and consider opportunities for price improvement.
For example, when executing a trade involving a stock listed on an exchange, the broker has the option of directing the order to the exchange or to a market maker, which is a firm that always stands ready to buy or sell a particular security. The order can also be routed through an electronic communications network (ECN) that automatically matches buyers with sellers.
The broker's decision as to how an order is executed can have an impact on the overall cost of the transaction; brokers are required by law to provide the best execution possible. Securities and Exchange Commission rules do not require brokers to execute a trade in a certain timeframe; however, they must inform the investor about the possibility of significant delays relative to their advertised speed of execution.
Related Terms
The term ex-pit transaction refers to a commodity transaction that takes place away from the floor of the exchange where it would normally occur. Ex-pit transactions typically involve the cash market and a private deal between two hedgers.
Moneyzine EditorJanuary 17th, 2024
The term exercise refers to the right granted in an options contract which allows the holder to buy or sell the underlying asset. American options allow the holder to exercise this right any time before the contract expires.Moneyzine EditorNovember 6th, 2024- The term price improvement refers to the process of obtaining a lower than offer price when buying a security or a higher than bid price when selling a security. Price improvement is one of the possible outcomes from a broker's duty of best execution.Moneyzine EditorNovember 6th, 2024
- The term payment for order flow refers to the compensation received by brokers from third parties when an order is routed to the third party for execution. Payment for order flow is one of several ways a broker is compensated when an investor places a buy or sell order.Moneyzine EditorNovember 6th, 2024
The term duty of best execution refers to the legal responsibility of a broker to provide the most favorable terms when executing an order on behalf of an investor. Factors a broker should consider under their duty of best execution include price, speed, and likelihood of execution.Moneyzine EditorNovember 6th, 2024
The term assigned refers to the process whereby the writer, or seller, of an option is asked to fulfill their obligation under their contract. When assigned, an option writer has the obligation to either sell or buy the underlying asset at the agreed to price.Moneyzine EditorNovember 6th, 2024
