Order types; click → settlement

Two halves: the small order-type zoo (you need only a handful), then the thing the M0 gate asks you to do — trace a market order from the click to truly owning the shares. That journey is longer and stranger than most lifelong traders realise.

The order-type zoo (the ones that matter)

You’ve met the two primitives:

• Market order — “execute now, any price.” Guarantees you trade; not the price. Exposed to slippage (M0.2 — it walks the book).
• Limit order — “this price or better.” Guarantees the price; not that you trade (may rest forever or fill partially).

That trade-off — certainty of execution vs. certainty of price — is the axis the whole zoo lives on. The rest are combinations and conditions:

• Stop order (stop-loss) — dormant until price crosses a trigger, then fires as a market order. “If it drops to 48, get me out.” Not resting visibly in the book — an instruction held until triggered. Classic risk tool, and a classic crash accelerant (cascading stops fire into a falling market).
• Stop-limit — same trigger, fires a limit order. Avoids a terrible fill, at the risk of no fill.
• Time-in-force — how long an order lives: Day (dies at close), GTC (good-til-cancelled, persists), IOC (immediate-or-cancel — fill what you can now, cancel the rest), FOK (fill-or-kill — all now or nothing).
• Hidden / iceberg — size not fully displayed (an iceberg shows a small “tip” that replenishes). How big players avoid telegraphing — relevant to adverse selection in M1.

Don’t memorise these like flashcards. The model is: every order is a position on the execution-vs-price trade-off, plus optional triggers and lifetimes. Reason from that axis rather than reciting.

What actually happens when you click “Buy”

You tap “buy 100 ACME.” It looks instant. Underneath, the order crosses several institutions and splits into two very different phases — execution (fast, seconds) and settlement (slow, a day+).

  YOU                                                    you own
  click ──┐                                              the shares
  "buy"   │                                                  ▲
          ▼                                                  │
   ┌─────────────┐   ┌──────────────┐   ┌──────────────┐    │
   │  1. BROKER   │──▶│  2. ROUTING   │──▶│  3. VENUE     │   │
   │  receives;   │   │  where to send │   │  matches vs   │   │
   │  best-exec   │   │  the order?    │   │  the book     │   │
   │  duty        │   │                │   │  (M0.2)       │   │
   └─────────────┘   └──────────────┘   └──────┬───────┘    │
                                                │  FILL       │
        ┌───────────────────────────────────────┘ (seconds)  │
        ▼                                                     │
   ┌──────────────┐      ┌───────────────────────────────┐   │
   │ 4. CLEARING   │─────▶│ 5. SETTLEMENT  (T+1)           │───┘
   │ CCP steps in  │      │ cash ⇄ shares actually swap    │
   │ novation +    │      │ via custodians / CSD           │
   │ netting       │      │ (DTCC, Euroclear ...)          │
   └──────────────┘      └───────────────────────────────┘

   ◀─── EXECUTION: seconds ───▶◀──── SETTLEMENT: ~1 day ────▶

1. The broker receives it. Your broker isn’t the market — they’re your agent, with a legal best-execution duty to get you a reasonably good outcome. Retail brokers usually don’t send your order straight to an exchange.

2. Routing — the interesting decision. The broker chooses where to send it:

• to a public exchange (NYSE, Nasdaq, LSE) to hit the lit book;
• to a wholesaler / market maker (Citadel Securities, Virtu) who pays the broker for the right to fill it — payment for order flow (PFOF), the reason “free” apps are free. The wholesaler internalises the trade, fills you at or just better than the public best price, and keeps the spread;
• to a dark pool — a private venue with no visible book — to trade large size without showing it.

Where your order goes shapes the price you get. This routing layer is a big part of how Citadel Securities earns — keep it in mind for M5.

3. The venue matches it. Wherever it lands, your buy meets resting sells and executes by price-time priority, walking the book if large (M0.2). You get a fill in milliseconds to seconds. You’ve “bought” — but you don’t own the shares yet.

4. Clearing. Between trade and ownership sits risk: what if the other side defaults before paying? A central counterparty (CCP) — the clearing house — becomes buyer to every seller and seller to every buyer (novation). You now depend on the CCP (which manages risk via margin + a default fund), not an anonymous stranger. It also nets: buy 100 and sell 60 of the same stock that day → only 40 needs to settle. That’s why firms trading millions of shares settle only a fraction.

5. Settlement. The real swap: cash one way, share ownership the other, recorded at a central securities depository (DTCC in the US, Euroclear/Crest in Europe/UK) and your custodian. On a delay — T+1 (trade date + 1 business day) for US equities since May 2024; the UK and EU move to T+1 in late 2027 (from T+2 today). Only after settlement are the shares irrevocably yours.

The big idea: a “trade” and “owning the thing” are separate events with a real gap between them. Execution is a fast price-discovery event; settlement is slow back-office plumbing; and clearing exists to manage the counterparty risk in the gap. Buying a stock isn’t one instantaneous act — it’s a relay race across at least four institutions.

Source: Larry Harris, Trading and Exchanges, ch.4–6 (order types) and the chapters on clearing & settlement. The SEC market-structure primers cover order routing & PFOF; for settlement mechanics, DTCC’s own explainers on T+1 are short and clear.