Investor education is an important part of avoiding broker misconduct, so it is critical that investors have a general idea of how trades work. The following is a short summary of what occurs when a stockbroker executes a buy or sell order.
Brokers usually have a choice of markets in which they can execute a trade. If the stock is listed on an exchange, the order may be directed — by the broker — to the same exchange, a different exchange or a “market maker.” A market maker is a firm which remains ready to pay publicly-quoted prices for a stock listed on an exchange and sometimes offers “payment for order flow,” a term that refers to a payment made from the market maker to a broker in exchange for having the order routed to it. OTC stocks can be sent to an “OTC market maker.” Brokers can also use internalization, in which the order is sent to another division of the firm and is then filled from the inventory of the firm. Finally, the broker may use an ECN, or electronic communications network, in which orders are automatically matched at specified prices.
The broker may choose any of the above methods for executing a buy or sell order so long as the method falls within the limits of “best execution.” Best execution refers to the broker’s duty to seek the method that is both reasonably available and most favorable to the customer. “Price improvement” is an important part of determining which method is determined to be the best execution. When an order has an opportunity to be executed at a price that is better than the current quote, this is an opportunity for price improvement. It is important to note, however, that price improvement is an opportunity, not a guarantee.
SEC regulations don’t have a set amount of time in which a trade can be executed, but investors should check to see if their firm advertises a specific speed of execution. In the case that a firm does advertise a speed of execution, the firm then is required to notify investors of significant delays and is not permitted to exaggerate the speed of execution.
If you believe you have been a victim of broker misconduct in which your broker failed to adhere to the duty of “best execution,” contact a stock broker fraud lawyer at The Law Office of Christopher J. Gray at (866) 966-9598 for a no-cost, confidential consultation.