While stock trades might seem like they occur instantaneously, they don't. When you initiate a trade with your broker, the order goes through your broker's routing system to an exchange that finds a trading partner before it is completed. If a delay occurs in the process, the stock trade waits until the market is ready to complete it.
In domestic trading of stocks that have high volume, the market usually has a closely matched number of buyers and sellers. At the same time, the markets themselves have the technological capacity to handle the trades quickly. Having ready buyers and sellers isn't enough for a trade to happen -- the market also needs to pair them and record the trade. However, things move relatively quickly -- some firms post average execution times that are under one-tenth of a second. A 0.08 second execution time, for example, means that you could execute five trades in one 400 millisecond blink of an eye.
One of the reasons trades get queued so rarely is that your broker possesses many ways to make your trade. It can send your transaction to the exchange on which the stock officially trades. Your broker also can send the trade to a different regional exchange, an electronic communications network, a market maker or even to its own trading department if it wants to sell you the stock at your price. The Securities and Exchange Commission requires your broker to choose the best way to execute your trade -- measured both in terms of speed and price.
When Queues Occur
Queues can occur whenever there is more demand for trading than there is bandwidth in the computer systems to handle the trades. For instance, if you try to initiate a trade in an overseas exchange when that exchange is closed, the trade will sit until the exchange opens. At that point, it'll be executed in the order in which it was received. In times of very high volume, your order can also get queued.
Why Queues Matter
As stocks trade, their prices move in increments. While you might see a stock go from $20.50 to $20.60, it probably traded at every price between those two levels in both cents and fractional cents. The sooner that you trade, the closer that you can get to the price that you were quoted. If your trade sits in a queue, orders ahead of you could be redefining the price while you are waiting.
- Fidelity: 1-Second Execution Guarantee
- Fidelity: Commitment to Execution Quality -- Execution Speed
- The New York Times: For Impatient Web Users, an Eye Blink Is Just Too Long to Wait
- U.S. Securities and Exchange Commission: Trade Execution: What Every Investor Should Know
- University of Pennsylvania: The Penn-Lehman Automated Trading Project
- The Wall Street Journal: For Superfast Stock Traders, a Way to Jump Ahead in Line
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