Exchanges, Buyers, and Sellers

Why this matters

When you press "buy" in a brokerage app, it feels instant and direct. It isn't quite either. Knowing who handles your order, and what they're allowed to do with it, helps you understand the costs you don't see and the choices you do have.

The main players

• You, the investor, deciding what to buy or sell.
• Your broker. A broker buys and sells securities on your behalf. Individual investors don't have a direct connection to the markets. Your order goes to your broker, who decides where to send it.¹
• Exchanges. A stock exchange is a regulated marketplace that matches buy and sell orders. The New York Stock Exchange and Nasdaq are the best-known in the US.
• Market makers. A market maker is a firm that stands ready to buy or sell a stock at publicly quoted prices.¹ By always being willing to trade, market makers help make sure there's usually someone on the other side of your order.
• Other trading venues, including electronic networks that automatically match buy and sell orders at set prices.

The journey of an order

Here's what happens, in simplified form, when you buy 10 shares of a stock.

Step 1You place an order to buy 10 sharesIn your broker's app

Step 2Your broker decides where to send itAn exchange, a market maker, or another venue

Step 3Your order is matched with a sellerOften in a fraction of a second

Step 4You receive a confirmationPrice, shares, time

Step 5The trade settlesShares and cash officially change hands

In step 2, your broker has several options. It can send the order to an exchange, to a market maker, to an electronic trading network, or, in some cases, fill it from its own inventory, which is called internalization.¹ Step 5, settlement, gets its own lesson later in Part 1: Settlement, Fees, and Fractional Shares.

Payment for order flow and best execution

Market makers profit from the small difference between the prices at which they buy and sell. Because of that, some of them pay brokers to send customer orders their way. This is called payment for order flow.¹

That creates an obvious question: is your broker sending your order where it's best for you, or where it's best for the broker? The rules address this through best execution. Your broker has a duty to seek the most favorable terms reasonably available for customers' orders, and to regularly review which venues offer them.¹

When markets are open

The core trading session for the New York Stock Exchange runs from 9:30 a.m. to 4:00 p.m. Eastern time on business days, and the exchange closes for certain holidays.³ Many brokers also let customers trade before and after that session, in extended-hours trading.

Trading outside regular hours comes with extra risks. Fewer buyers and sellers are active, so it can be harder to get an order filled at a good price, the gap between buying and selling prices tends to be wider, and prices can swing more.⁴

Key takeaways

• Your broker receives your order and decides where to send it to be filled.
• Exchanges match orders. Market makers stand ready to buy and sell at quoted prices, which keeps trading continuous.
• Some market makers pay brokers for orders. Brokers still have a duty of best execution.
• Extended-hours trading usually means fewer participants, wider price gaps, and bigger swings.

Check your understanding

Which statement best describes what happens after you place an order in a brokerage app?

1. It goes straight to the stock exchange, which fills it.
2. It goes to the company whose stock you're buying.
3. Your broker receives it and decides which venue to send it to.

A friend says trading is "completely free" at their broker because there's no commission. What's the most accurate response?

1. There's no commission, but trades can still have costs that are less visible.
2. They're right: with no commission, a trade costs nothing beyond the price of the shares.
3. Commission-free brokers aren't allowed to exist.

What's next

Every stock has two prices at any moment: one for buying and one for selling. The next lesson, Bid, Ask, and the Spread, explains the gap between them and why it's a real cost.