Execution: Definition, How Orders Are Filled, and Key Considerations

What is execution?

Execution is the completion—or filling—of a buy or sell order for a security. An order is executed when it is matched and settled in the market, not when the investor places it. After submission, a broker determines the route and method used to execute the trade.

How orders get executed

Brokers may execute orders through several channels:

• Exchange floor brokers — a human trader routes and fills the order; can be slower.
• Market makers — firms that provide continuous bid and ask quotes (common on electronic exchanges such as NASDAQ).
• Electronic Communication Networks (ECNs) — automated systems that match buy and sell orders electronically.
• Internalization — the broker fills the order from its own inventory or matches it internally (internal crossing).
• Dark pools — private trading venues that can match large institutional orders with limited public visibility.

Each route has tradeoffs in speed, price, and transparency.

Types of orders (brief)

• Market order — buy or sell immediately at the best available price; prioritizes speed over price certainty.
• Limit order — buy or sell at a specified price or better; prioritizes price over speed and may not fill.
• Stop order (stop-loss) — becomes a market order when a specified trigger price is reached; used to limit losses or enter positions.
• Stop-limit order — becomes a limit order when a trigger price is reached; avoids execution below/above a limit but may not fill.
• Take-profit order — an order set to close a position at a target profit level (often implemented as a limit order).
• Trailing stop — a stop that adjusts with favorable price movement to lock in gains.
• Conditional/contingent orders — execute only if specific conditions are met (e.g., one-cancels-the-other, OCO).
• Iceberg order — a large order split into visible and hidden portions to reduce market impact.

Order duration (Time in Force) options

• Day order — expires at market close if not filled.
• Good ’Til Canceled (GTC) — remains active until filled or canceled (may expire by broker policy).
• Immediate or Cancel (IOC) — fill any portion immediately; cancel any unfilled portion.
• Fill or Kill (FOK) — must be filled in full immediately or canceled.
• Market-on-Open (MOO) / Market-on-Close (MOC) — executed at market open or close respectively.

Best execution and broker obligations

Brokers are legally required to seek the best possible execution for client orders. Regulations require brokers to:

• Seek the best available price, speed, and likelihood of execution given order conditions.
• Report execution quality (e.g., stock-by-stock metrics, price improvement) and disclose when orders are not routed for best execution.

In practice, routing decisions involve tradeoffs: attempting price improvement can reduce execution speed or fill probability, and large orders may be broken up to limit market impact. Disclosures about routing and execution quality are often available on trade confirmations or broker reports.

Execution risks

• Slippage — the difference between the expected price and the actual execution price, common in fast-moving markets.
• Market impact — large visible orders can move prices against the trader before execution.
• Fill risk — limit and stop-limit orders may not execute if prices move away.
• Latency risk — delays between order placement and execution can affect price, especially for large or high-frequency trades.

Dark pools and block trades

Dark pools are private venues used mainly by institutions to execute large orders without revealing size on public exchanges. Advantages include reduced market impact and potential execution near the midpoint of the bid-ask spread. Drawbacks include reduced transparency and limited access for retail investors.

Example

Olga places a sell order for 500 shares at $25. Her broker finds an internal match at $25.50 while the public market quote is $25.25. Executing internally nets Olga a better price, illustrating how routing and venue selection can affect execution outcomes.

Key takeaways

• Execution is the actual filling of an order—how and where the order is routed affects price, speed, and probability of fill.
• Orders can be routed via exchange floors, market makers, ECNs, internal crosses, or dark pools—each has pros and cons.
• Choosing order type and time-in-force determines trade behavior: market orders favor speed, limit orders favor price control.
• Brokers must strive for best execution and report execution quality, but tradeoffs and execution risk (slippage, market impact, latency) persist.
• For large or complex orders, consider execution venue and order strategies (e.g., limit, iceberg, dark pool) to manage cost and market impact.