Order Execution Systems: The How & Why Explained

Behind the scenes of every trade, there is a fascinating web of technology at play. 

Although they’re not always the center of attention in the trading world, order execution systems are the stars backstage with hefty responsibilities that impact every corner of the trading environment. 

Understanding the order execution process is important for brokers. It helps to identify reliable systems and fulfill their obligations to clients, stakeholders, and regulatory bodies. 

We’ve compiled six easy-to-digest questions and answers to bring you up to speed on the basics of order execution systems. 

What is trading execution?

When investors buy and sell stocks, bonds, and other securities on the stock market, they place orders (or trades). The orders are sent to a broker, who directs them to the appropriate exchange or dealer network (routing). The broker then facilitates the transaction by finalizing the order (completion). The entire process is called ‘trade execution’ or ‘order execution’. 

‘Trade’ and ‘order’ can be used interchangeably in this context. 

How fast and accurately this process is completed impacts the final price that is paid to the investor. As you can imagine, investors are not pleased if the broker uses a system with latency or incorrect pricing data that causes them to lose profit. 

What does an order execution system do?

An order execution system is a network of advanced technology and protocols that handle placement, routing, and completion of trades. 

Order routing: Directing orders to the most appropriate exchange or dealer network.

Price matching: Executing orders at the best possible price available.

Confirmation: Let the trader know the order has been executed immediately. 

Orders are being placed at a mindblowing speed — not seconds, or even milliseconds, but microseconds!

For example, our proprietary order management system DXOMS is ultra-low latency, that is, it may execute and confirm orders in sub-50 microseconds.

When we consider this volume, we realize the huge responsibility a stock trading execution system has on its plate. 

What are the different types of orders?

The first step in understanding order types is to nail the difference between market and working orders. 

When investors place market orders, they want them executed as rapidly as possible, at the best available current price. We mentioned earlier the problem of latency. If the price changes between the time the investor places their order, and the time the order execution is complete, the investor could be exposed to slippage. 

Working orders, on the other hand, aren’t executed until their predefined conditions are met (e.g. 𝒙 quantity of assets when 𝒙 price is reached). For this reason, they are also known as pending orders. 

In a nutshell, market orders are convenient when speed is more important than precision. Working orders are more suitable for investors who are focused on price. 

Common types of working orders

Stop orders: An order to buy or sell once the price reaches a specified level, known as the stop price.

Limit orders: An order to buy or sell at a specific price or better.

Stop-Limit orders: A combination of both stop and limit orders. Once the stop price is reached, the order becomes a limit order instead of a market order, meaning stock execution will only happen at the specified limit price or better.

Trailing stop orders: A type of stop order that adjusts the stop price at a fixed percentage or monetary amount below or above the market price.

OCO (One-cancels-the-other orders): A pair of orders linked together, with the condition that if one order is executed, the other is automatically canceled. (A form of risk management and trading strategy)

For a full overview of different order types, check out this article: What are working orders and why are they used. 

Fractional and notional quantities

Investors can also fine-tune the specifics of their orders using fractional and notional trading. 

Fractional quantities: Buying or selling a fraction of a share rather than a whole share. 

Notional quantities: Placing an order for a defined amount (notional value) rather than the number of shares.

Equities execution systems are responsible for ensuring this is carried out accurately. For example, the Devexperts turnkey fractional OMS ensures zero risk exposure, substantial cost savings, and maximum efficiency thanks to the implementation of the Route as Received workflow and pre-allocated block orders.

What factors can influence trade execution?

Let’s look at the factors that impact how well the trade execution system can do its job. 

Market conditions

High volatility and low liquidity can impact the speed and price at which an order is executed.   In volatile markets, prices can change rapidly, increasing the risk of slippage, while low liquidity can make it harder to find a counterparty for the trade.

Order size

The order execution management system may need to break down large orders into smaller ones to execute them without significantly affecting the market price. Executing a large order all at once can move the market, causing unattractive price changes. 

Execution venue

Different exchanges and dealer networks may offer varying levels of liquidity and price improvement. Some venues might have better matching engines, leading to faster executions and potentially better prices.

The quality of brokers’ systems

The trading and execution technology used by brokers can impact the efficiency of market execution. Quality systems offer faster processing times, better routing algorithms, and more advanced risk management tools, all contributing to desirable and effective trade execution.

What components does a good order execution system have? 

Here are two areas to pay attention to when identifying a reliable order execution system. The first is real-time exposure monitoring. 

A reliable order and execution management system should offer automatic and manual hedging to monitor and manage client exposures and overall risk, with advanced filtering for individual groups or accounts. It should also provide detailed views of exposures at both currency and currency pair levels and include tools to monitor broker hedging positions. 

The second is execution settings. Here is a list of important functions that market order execution should include:

• Execution rules
• Smart order routing rules
• Exposure limits 
• Speed bump settings
• Tiered margining settings 
• Margin settings
• Price collars
• Kill switch

Learn what each of these rules and settings means here. 

Are market executions subject to regulations? 

Best Execution is a regulatory requirement mandating brokers to seek the most favorable execution terms for their client’s orders. This obligates them to consider factors such as price, speed, and likelihood of execution. Regulatory bodies like FINRA and the Securities and Exchange Commission (SEC) monitor adherence to this rule. 

Wrap-up

We can now understand why brokers place so much importance on trade execution systems! 

Trading and executions go hand in hand. There are regulatory repercussions if a broker’s order execution process isn’t up to scratch. Their clients rely on consistent, transparent, and fast trade execution at incredible speeds for retention. Then there is risk management to ensure protection. 

The Devexperts Order Management System DXOMS stands out in the industry for handling the entire lifecycle of an order, with best-in-class speed and accuracy. 

If you’re a broker looking for an order execution system that provides peace of mind, run your needs by our team. Our systems are backed by two decades of experience, and our account managers are knowledgeable, responsive, transparent, and ready to help.