How Trading Works: The Life of a Trade

In The U.S. Equity Option Market

Pre-Trade:

News, tips, technical analysis, and/or discussions about what to buy or sell.

Investors evaluate their investment positions and strategies based on news, corporate actions, a financial advisor’s recommendations, technical analysis, or word-of-mouth from other investors.

Initiate a Trade

Contact financial advisor, broker or independently research stocks and options.

Options are an extremely versatile investment tool. Because of their unique risk/reward structure, options can be used in many combinations with other option contracts and/or other financial instruments to create either a hedged or speculative position.

Place an Order

The broker enters an order.

Brokers enter orders into their order management system, or investors enter orders themselves through their online brokerage accounts. An order includes a buy or sell indicator, the name of the underlying security (or its ticker symbol), the number of contracts (one standard option contract covers 100 shares of underlying security), the type of contract (put or call), the strike price (or exercise price), the expiration date, and potentially a limit price on the premium to be paid/received (the investor-designated maximum/minimum execution price), or other order handling instructions (See Bats Exchange Rule Book for additional information on order types).

Order Goes to an Exchange

The order is sent to interact with other orders at a marketplace.

These orders are sent across secure connections to electronic exchanges such as Bats, the Chicago Board Option Exchange, or the International Securities Exchange, to execute with orders that were placed by other investors or market makers which provide quotes in standardized listed options. The U.S. equity option exchanges are interconnected, so no matter where an order is initially sent, it cannot be executed a price worse than the best price displayed on any exchange.

Trade Is Executed

The order is paired at the exchange with another order to make a trade.

  1. Orders are paired with matching orders from other investors or market makers to buy or sell the desired number of contracts. All orders resulting in trades are required by the SEC to be executed at the best possible price for both sides of the trade
  2. When a trade is executed, individuals are charged a fee from their brokers.
  3. The broker will receive payment or be charged a fee based on how and where they executed the order.

Trade Information Is Sent to Clear and Settle

Trades are confirmed and money is transferred.

All trade information is sent to the Options Clearing Corporation (OCC) in real time. All option contracts traded on the equity option exchanges are issued, guaranteed and cleared by the OCC. The broker broker/dealers’ settling banks send funds to or receive funds from the OCC to complete settlement.

Post-Trade

Trade notification reaches the investor.

Investors are notified of the trades by their brokers or via their Web accounts immediately. Owners of options decide if and when they want to exercise their options and give their exercise notice to their broker.