What Every Investor Should Know
When you place an order to buy or sell, you might not think about where or how your broker will execute the trade. But where and how your order is executed can impact the overall costs of the transaction, including the price you pay for the stock. Here's what you should know about trade execution:
Trade Execution Isn’t Instantaneous
Many investors who trade through online brokerage accounts assume they have a direct connection to the market/liquidity provider. But they don't. When you push that enter key, your order is sent over the Internet to your broker—who in turn sent the order to the market/liquidity provider for execution. A similar process occurs when you call your broker to place a trade.
While trade execution is usually seamless and quick, it does take time. And prices can change quickly, especially in fase moving markets. Investors may not always receive the price they saw on their screen or the price their broker quoted over the phone. By the time your order reaches the market/liquidity provider, the price of the financial instrument could be slightly – or very – different.
No regulations require a trade to be executed within a set period of time. But if firms advertise their speed of execution, they must not exaggerate or fail to tell investors about the possibility of significant delays.
Your Broker Has a Duty of “Best Execution”
Many firms use automated systems to handle the orders they receive from their customers. In deciding how to execute orders, your broker has a duty to seek the best execution that is reasonably available for its customers' orders.
How does Trade Execution Speed Affect My Performance?
It is important to understand that the currency pairs traded in the forex CFDs market can change value rapidly. In fact, the change is so rapid in such a way that the price of a currency pair can change in value as you place the trade and change again by the time it is executed. Therefore, it is possible to lose a considerable amount of money in a situation where you are placing a larger trade. In this case, it is important that your order reach the market as quickly as possible in order to get the expected rates. The role of time in forex trading cannot be over emphasized as getting your orders to the market quickly should always be the target. Therefore, you will surely need a broker with a powerful routing system to make this possible.