Bid-ask spreads, routing paths, and order choice

The ticket is an implementation-cost decision

Bid and ask quotes are set by buyers and sellers and are reset continuously as market action changes them. The ask is the lowest price a seller will currently accept, the bid is the price buyers will currently pay, and the spread is the difference between those two quotes.

Editorial reading from TradersWeek: treat every ticket as an implementation-cost decision. First choose whether fill certainty or price control matters more, then inspect the spread, the routing path, and the confirmation so the executable order is selected with those costs in view.

Read the spread before you choose a path

Liquidity is the largest influence on spread width. Names that are easier to enter and exit tend to have narrower spreads.

The broker or specialist handling the trade keeps the spread, and that amount is separate from any commission charged to place the order.

Editorial reading from TradersWeek: because the spread is kept by the handler of the trade and is distinct from commission, it belongs in the same review as the order type and the routing path.

Fill certainty or price control

When a market order is used, completing the trade is treated as more important than obtaining the most favorable price.

A limit order signals that a specified price matters more than immediate completion. A limit order is usually matched on an electronic communications network that automatically pairs buy and sell interest.

Editorial reading from TradersWeek: make that priority explicit before the ticket is sent, so the instruction matches the cost already accepted.

Inspect the routing path

A broker can complete an order by internalization from firm inventory, by matching on an electronic communications network, by sending it to an exchange floor, or by sending it to a market maker.

Internalization is a fill taken from the brokerage firm's own inventory and is often the fastest completion path.

Editorial reading from TradersWeek: name the path before the ticket is sent, because internalization, an electronic communications network, an exchange floor, and a market maker are different ways of completing the same order.

Check the confirmation

Disclosure rules required brokers to publish order-execution and routing practices. A broker must tell a customer when an order was not routed for best execution.

Best execution is a routing standard under which a broker must tell a customer when an order was not sent for the most favorable available execution.

Editorial reading from TradersWeek: the confirmation is the last check that the chosen order and path were the ones actually used.