Retail routing and market versus limit fills

Market order or limit order

A market order is an instruction to buy or sell immediately at whatever price is available, with no trader-set cap or floor on the fill. A limit order is an instruction to buy or sell only at a stated price or better, so the worst acceptable fill is chosen by the trader.

Professional traders were described as rarely using market orders and as paying by the share, with a 100-share New York Stock Exchange limit order typically costing at most 1.00. Retail customers used market orders to reduce the ticket charge, a per-order commission typical of retail accounts and distinct from a per-share execution fee.

Order routing and the receiving dealer

Order routing is the path a firm uses to send a ticket to a designated market maker, specialist post, exchange, or electronic communication network. Market makers could pay online brokers for routed tickets. Payment for order flow is that compensation, and it could send a retail order away from the best displayed price, the highest bid or lowest offer then shown by a competing market maker or electronic communication network.

A Securities and Exchange Commission chairman was cited as stating that 85% of Nasdaq market orders were not given the best price. Once a market maker received a routed order, that dealer had a short interval in which to honor or reject its own bid or offer.

Retail status and the specialist post

Keeping retail customer status preserved regulatory and arbitration protections but forfeited firm trading capital and a direct connection to New York Stock Exchange specialist posts. A specialist post is the New York Stock Exchange location historically used for a more direct handoff of a professional order. By 1999, professional traders were required, at minimum, to pass the Series 7 registered representative examination.

So-called direct-access retail brokers still had to send tickets through the firm for compliance, so a 20,000-share buy against a 20,000 account would be rejected before reaching the exchange.