Glossary: Trading and Execution Terms
Introduction
This glossary defines 30 trading and execution terms with concise definitions focused on practical application. Bookmark this page for reference when reading market commentary or broker documentation.
Terms
All-or-None (AON): An order condition requiring the entire order quantity to be filled in a single execution or not at all; prevents partial fills but may result in no execution if full liquidity is unavailable.
Alternative Trading System (ATS): An SEC-registered trading venue that matches orders outside traditional exchanges, including dark pools and crossing networks; approximately 12-15% of U.S. equity volume executes on ATS venues.
Ask (Offer): The lowest price at which a seller is willing to sell a security; you buy at the ask when placing a market order to purchase shares.
Bid: The highest price at which a buyer is willing to purchase a security; you sell at the bid when placing a market order to sell shares.
Bid-Ask Spread: The difference between the highest bid and lowest ask prices; represents the immediate cost of executing a round-trip transaction and varies from $0.01 on liquid stocks to $0.50+ on illiquid securities.
Block Trade: A large securities transaction, typically 10,000+ shares or $200,000+ notional value, often executed through dark pools or negotiated trades to minimize market impact.
Circuit Breaker: Exchange-mandated trading halts triggered when prices move beyond specified thresholds; the S&P 500 triggers halts at 7%, 13%, and 20% declines from prior close.
Dark Pool: A private trading venue where order information is not visible to the public until after execution; used primarily by institutional traders to reduce market impact on large orders.
Day Order: An order that expires at the end of the current trading session if not executed; the default order duration at most brokers.
Direct Market Access (DMA): Electronic trading infrastructure that allows traders to place orders directly on exchange order books without broker intervention; typically requires minimum account sizes and additional fees.
Fill-or-Kill (FOK): An order condition requiring immediate and complete execution or automatic cancellation; used when partial fills would create position sizing problems.
Good-Till-Canceled (GTC): An order that remains active until executed, canceled by the trader, or expired by broker policy (typically 60-180 days).
High-Frequency Trading (HFT): Automated trading strategies that execute large numbers of orders at speeds measured in microseconds, typically holding positions for seconds or less.
Immediate-or-Cancel (IOC): An order condition requiring immediate execution of any available quantity, with unfilled portions automatically canceled; useful when you want current liquidity only.
Implementation Shortfall: The difference between the decision price (when you decided to trade) and the actual execution price; captures opportunity cost, market impact, and timing costs.
Limit Order: An order to buy or sell at a specified price or better; provides price certainty but no execution guarantee if the market doesn't reach your price.
Liquidity: The degree to which a security can be bought or sold without significantly affecting its price; measured by bid-ask spread, volume, and order book depth.
Market Impact: The effect of your own trading on the security's price; large orders push prices against you as you consume available liquidity at each price level.
Market Maker: A dealer who provides continuous bid and ask quotes, profiting from the spread while providing liquidity to other traders; obligated to maintain orderly markets in assigned securities.
Market Order: An order to buy or sell immediately at the best available price; guarantees execution but not price, potentially resulting in significant slippage on large orders or illiquid securities.
National Best Bid and Offer (NBBO): The best available bid and ask prices aggregated across all U.S. exchanges; brokers must generally provide execution at or better than NBBO.
One-Cancels-Other (OCO): A paired order where execution of one order automatically cancels the other; commonly used to set simultaneous stop-loss and take-profit levels.
Payment for Order Flow (PFOF): Compensation paid by market makers to brokers for routing retail orders to them; enables commission-free trading but creates potential conflicts of interest.
Portfolio Margin: A risk-based margin calculation method that considers the net risk of the entire portfolio; typically requires $100,000+ account equity and reduces margin requirements by 50-70% for diversified portfolios.
Price Improvement: Execution at a price better than the NBBO at the time of order entry; commonly occurs when market makers fill orders between the bid and ask.
Regulation T (Reg T): Federal Reserve regulation governing margin lending for securities purchases; requires 50% initial margin for equity purchases.
Slippage: The difference between expected execution price and actual execution price; occurs due to market movement, liquidity gaps, or execution delays.
Stop-Limit Order: An order that converts to a limit order once a trigger price is reached; provides price protection but risks no execution if the market moves through your limit.
Stop Order (Stop-Loss): An order that converts to a market order once a trigger price is reached; guarantees execution but not price, and may execute significantly below the stop price during gaps.
VWAP (Volume-Weighted Average Price): A benchmark calculated as total dollar volume traded divided by total shares traded over a period; used to evaluate execution quality and as an algorithmic trading target.
Cross-References
For detailed treatment of these concepts, see:
- Designing a Written Trading Plan
- Broker Selection Criteria for Active Traders
- Using Options for Synthetic Exposure
- Leveraging Portfolio Margin Accounts
- When to Use Alternative Trading Systems
Updates
This glossary is updated quarterly to incorporate new market structure developments and regulatory changes. Terms are added as trading practices evolve.