When we talk about how equity trades are executed, it all comes down to how orders reach the market and how prices are formed through the constant interaction between buyers and sellers.
Some investors trade through brokers or dealers who take risk and quote prices directly.
Those risk trades typically happen off book negotiated bilaterally between the two parties.
Others send their orders electronically into the market where they're matched automatically against other participants through the order Book, the electronic system that pairs buyers and sellers in real time and is also visible to exchange members in real time.
The order book lists all current limit orders to buy and sell a stock.
Each order shows a price and a size, so traders can see not just a single quote, but the full depth of the market.
How many shares are waiting to be bought at each price level, and how many are being offered for sale.
On the left side, you'll find the bid prices.
These are the prices where buyers are willing to buy.
On the right side are the offers or asks where sellers are willing to sell.
The best bid is the highest price a buyer is currently quoting, and the best offer is the lowest price a seller is quoting together.
They form what traders call the inside market or the touch, and the difference between them is the bid asks spread. Let's assume the best or highest bid is 182.8, and the best or lowest offer is 183.1.
That means a trader can sell shares immediately at 182.8 or buy at 183.1.
Behind those top prices sit many other orders, deeper layers of liquidity waiting in the book.
The more depth there is, the less the price will move when a large trade hits the market.
