Stocks often trade on more than one market.
So when your brokerage firm receives your buy or sell order, the
question is where to execute the trade. Your broker is required
to seek what is widely known as best execution for your trade
among the available alternatives.
Best execution takes into account a number
of factors, including price, speed, size of the trade, and reliability
of the marketplace. Part of the choice is also dictated by where
the stock is listed. And part may be influenced by the way your
brokerage firm customarily routes its orders.
In the back office
Before the order can be executed, though, the firm's operations
area — sometimes described as the back office — verifies
the details of the order. That's a three-step process that
includes keying the security, the quantity, and the type of transaction
into an order-match system, searching a client database and a
security database, and compiling the information in one electronic
record.
These operations may be handled by your own
firm if it is a
clearing
firm,
or through the clearing firm your brokerage
firm works with. Non-clearing firms are called introducing or
correspondent firms.
Company
choice
Why do some brokerage firms choose to clear their own trades, while others don't? The decision is based on their analysis of the return on investment (ROI) in the resources required to clear different types of securities. Depending on its trading volume and the use the services of a clearing firm.
