How Electronic Trading Works

So let's make a trade. Since we're talking about electronic trading, the first step is to sit down at your keyboard and log in to your brokerage account. Once you log in, regardless of the broker dealer, you'll be able to do several things:

The systems that make this Web interface possible are Web servers very much like the servers for any Internet site. There may need to be hundreds of Web server machines -- a large broker dealer can have millions of customers. And the Web servers need to be operating with secure connections to protect privacy. But beyond that, the servers can be fairly ordinary. See How Web Servers Work for details.

So let's imagine you want to buy 100 shares of the ABC company. You check the price of that stock on the quote screen and see that it costs $20.40 to buy it at this moment. You enter in an order to buy 100 shares at $20.40 a share.

Your broker dealer will transmit your order to a stock exchange. If the ABC company trades on the NASDAQ stock exchange, the order goes there. Inside the NASDAQ exchange, there's a computer that's dedicated to handling all the orders coming from your broker dealer. (Since there are several hundred broker dealers dealing on the NASDAQ exchange, there are several hundred dedicated broker dealer machines.)

Having received your order from your broker dealer, the exchange will try to match your buy order up with a sell order from someone else. If it can find a match, you'll have executed a stock trade. If not, your trade will sit on the exchange waiting for a matching order. See How the NASDAQ Stock Exchange Works for details on what actually happens inside the stock exchange.

Now, the exchange sends a message back to the broker dealer saying the trade is complete. He updates your account information, withdraws money from your account and changes your portfolio to reflect your new stock.