Order FlowHetvi Shah
What is Order Flow
Trade Order means various types of orders which can be placed on stock exchanges for financial assets like stocks and futures contracts. It consists of instructions to a broker/brokerage firm to purchase a financial asset on behalf of investors. Execution of order goes through series of sequential steps before the completion of a transaction. Order flow analysis helps in recognizing the final details of buying and selling volume. Order flow analysis helps in predicting with a good amount of certainty where order imbalance awaits at a future price level.
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Steps involved when the customer places an order:
- The decision to trade: The trade order cycle is initiated by a client who wants to buy or sell securities. The client is required to make a decision whether he/she wants to buy or sell securities, based on liquidity conditions and requirements. He/she might reshuffle holdings in response to changes in market conditions.
- Order Placement: The client then selects the broker and instructs the broker to place a buy or sell order on a stock exchange.
- Trade Execution: As soon as the matching buy/sell order is found, the order is converted into the trade.
- Clearing of Trades: The trades are netted to determine the obligations of the trading members to deliver securities according to the settlement schedule.
- Settlement of Trade: Finally, the seller delivers the securities and the buyer receives the securities and acquires ownership of the securities.
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How Orders get Executed?
The trade order is said to be executed when it gets filled, not when it is placed. When the investors submit the trade, it is sent to the broker and he determined the best way to execute it. There are various ways to execute a trade.
- Order to the floor: The floor broker needs to receive and fill the order. Order to floor can be time-consuming as human traders process the transaction. In some cases, a fee may be charged for the privilege to execute a broker’s order known as ‘payment for order flow’.
- Order to Market Maker: The broker may direct the trade to the market maker for the purpose of execution. In some exchanges, market makers are responsible to provide liquidity. A market maker can be referred to as a firm that buys or sells a stock.
- Electronic Communications Network: ECN is an efficient method whereby computer systems electronically match the buy and sell orders.
- Internalization: It is a way of internal crossing which means, if the broker holds the same stock as used for trade order, he may decide to execute the order in-house. This type of execution is accompanied by the broker’s firm making additional money on the spread.
Brokers have to execute a transaction that is best for their clients. Therefore, brokers will evaluate all the orders they receive from their clients and how these orders can be executed at the best prices. Order flow information gives them an idea with some level of certainty whether the stock price would move up or drop. This helps in executing the order at the best possible price.
Author: Hetvi Shah
About the Author: Hetvi is a BBA(Finance) graduate. She is currently pursuing an MBA with Finance specialization. She has a keen interest in Financial Market, Financial Management, and Financial Analysis.