Execution (Investing)

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

ex-pit transactionexerciseprice improvementpayment for order flowduty of best executionassigned