Welcome back. Now that we’ve run through the major components of our introductory course on U.S. equity market structure, we wanted to take everything we’ve learned and put it into practice by laying out the life cycle of one simple order from start to finish.
First off, what are we trying to trade? Let’s say your order is to buy 1,000 shares of General Electric (GE). What does the market look like at the starting line? The last sale of GE was at $10, and now the best bid is $9.99 and the best offer is $10.
You have a retail trading account with a broker online so that’s where you go to trade. You pull up the interface to enter your instructions for your order.
Order Type and Instructions
- You think the $10 price is pretty good based on your understanding of the fair value of the stock.
- You set your limit for $10.
- You’ve decided that you want to make sure you don’t pay more if the price goes up.
- You enter all your information into the interface and hit preview.
- Everything looks good, and you click transmit.
Entering the Market
- When your order enters the market, there happens to be 500 shares of resting, non-displayed interest at the midpoint.
- So, 500 shares gets filled at the midpoint of $9.99 and a half cents, saving you $2.50 compared to the $10 quoted in the market.
- For the rest of the order (500 shares), your electronic broker sends your order to the exchanges, quoting at $10. Fortunately, there are enough orders available in the market that your full order is executed at that price.
- It costs you $5,000.
- In total, you pay $9,997.50 for the 1,000 shares of GE, a solid execution of your order when you compare it to your original intent.
Of course, there are many other instructions you could have given to your order that could have affected how it would trade.
For example, you could have selected another order type, like IEX’s D-Peg, depending on what your brokers interface supports. Particularly, if this is a larger order that will take some time to execute, this midpoint-type, pegged order could help protect you from trading while the price is unstable, according to the machine learning-based functionality that IEX developed for that order type.
Check out more details for particular order types with your broker to find the order types that are best for you.
Thank you again for tuning in to this course. If you have questions or are interested in more detailed content about trading and today’s U.S. equity market structure, please do not hesitate to reach out.
Note that videos were recorded in December 2019.
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