How Online Investment Trading Works - dummies

By Matt Krantz

When you buy or sell a stock on your online broker’s site, your order is usually filled in seconds. But, before that transaction is completed, in milliseconds your order snakes its way through an advanced security trading system that has taken decades to build.

Just a few years ago, it could take about 12 seconds for a trade to go from your desk to the floor of the New York Stock Exchange and back. But now that most of the steps have been computerized, it takes about a second.

Using NASDAQ as an example, here’s what happens in the one second it takes to execute an online trade:

  1. You enter your order with your online broker.

  2. The order is placed in a database.

  3. The database checks all the different markets that trade the stock and looks for the best price.

    The different markets might include the NASDAQ and New York Stock Exchange in addition to electronic communications networks (ECNs). ECNs are computerized networks that connect buyers and sellers of stocks.

  4. The market that successfully matched the buyer and seller sends a confirmation to both parties’ brokers.

  5. The order and the price are reported to the regulatory bodies that oversee trading activity so that they can be displayed to all investors.

  6. NASDAQ stores a record of the trade in case regulators want to study past transactions.

  7. NASDAQ sends a contract to the broker who sold the shares and the broker who bought them.

After all that is completed, the brokers have three days, called T+3, to actually exchange the cash and shares in a process called settlement. Then the money or shares are officially in your account.