About U.S. stock exchanges
Introduction
There are currently 13,470 securities traded on U.S. stock exchanges. Here is a summary based on the exchange that the securities are listed on:
| ISO MIC | Description | # of stocks |
|---|---|---|
| XNYS | NEW YORK STOCK EXCHANGE, INC. | 3,144 |
| XASE | NYSE MKT LLC | 320 |
| ARCX | NYSE ARCA | 4,554 |
| XNAS | NASDAQ - ALL MARKETS | 4,681 |
| BATS | CBOE BZX U.S. EQUITIES EXCHANGE | 771 |
It is clear from the above data how the NYSE and NASDAQ dominate the market. Cboe runs the BATS BZX exchange, which has a niche as an exchange that is tailored towards exchange traded funds ("ETFs").
Does the exchange a security is listed on matter?
The above data shows where a security is "listed". What does that mean? When a company wants to have a publicly traded security, the company has to pick one exchange as the exchange the security is listed on. Each exchange has its own rules on how to list a security, so to a company trying to go public, the decision as to which exchange it picks to list on is an important one. But does it really matter to an investor which exchange a security is listed on? Maybe in the past, it made a difference whether a security was listed on a NYSE or NASDAQ exchange, but the distinction doesn't seem to matter anymore. Once a security is listed on an exchange, the security is actually bought and sold on all the exchanges, and, as explained below, on trading systems that are not an exchange.
Volume by exchange
The above data shows where securities are listed. But once listed, a security can be traded on any U.S. exchange. And there are actually a few U.S. stock exchanges that trade securities but do not have any securities listed on them. These include startup exchanges like IEX and the Members Exchange plus various exchanges that used to be independent exchanges but have since been acquired by the NYSE, NASDAQ or Cboe. So let's look at trading volume by stock exchange. Here's the trading volume for today, if the market is open, or for end of day yesterday, if the market is closed
Alternative trading systems
Notice that in the above table shares traded off an exchange amounted to 46% of all trading activity. That's because there are currently 30+ alternative trading systems, or "ATS", that handle a large volume of trading. You can see a list of ATS on FINRA.org. ATS are often referred to as "dark pools" because there is not as much transparency about trading in an ATS as there is on a national exchange.
The largest ATS are run by the big banks like UBS, Credit Suisse, Goldman Sachs, Deutsche Bank and JP Morgan. The big banks use the ATS to trade on behalf of their own clients and to trade on their own accounts. But there are other ATS run by independent companies like Level ATS or Instinet. FINRA has another part of their website where they disclose weekly volume by ATS.
Dark pools originally came about primarily to facilitate block trading by institutional investors who did not wish to impact the markets with their large orders and obtain adverse prices for their trades. It can be a difficult task for a large institution to sell or buy 1,000,000 shares of a company's stock without unduly impacting the market price of that stock. And dark pools continue to be used for that purpose. But they have also become widely used for all kinds of trading, which explains why they account for 46% of all trading activity.
How do orders get executed?
How does so much volume end up in dark pools? Large institutions can usually control how their trades get executed, so they can choose to directly send trades into dark pools. But even retail investors can have their trades executed in a dark pool. When a retail investor places an order through a broker, the investor usually does not, or cannot, direct how it gets executed. Every broker has their own system and rules in place as to how to execute orders. Those rules usually involve either 1) sending the order to one or more companies that handle order execution, known as "market makers"; or 2) sending the order to an exchange. Orders sent to a market maker will be executed as the market maker sees fit, including sending the order to a dark pool. In fact, several market makers like UBS and Virtu run their own dark pools.
Is it possible to see how my orders are getting executed? Not really. Sort of. Brokers are required to submit a quarterly report on how they executed trades to the Securities and Exchange Commission. This report is called a Rule 606 report. Most brokers post their Rule 606 reports online. As an example, you can see a copy of Schwab's 606 report. Just google "Etrade rule 606 report" and you will find them.
The Rule 606 reports are interesting but they mostly will show you that Schwab and Etrade send most orders to one of the big market makers like Virtu, Citadel Execution Services and G1 Execution Services. What happens after that is unclear.
What is pay for order flow?
One reason that most of the brokers send their orders to the market makers is that the market makers pay the brokers a "rebate" for any order sent to them. Schwab, Etrade, TD Ameritrade, and Robinhood all participate in this practice. In fact, its why brokers like Robinhood and others can offer commission free trading. Robinhood and the other brokers make millions, if not billions, of dollars routing orders to the market makers. The Rule 606 reports include disclosures about how much pay for order flow a broker receives.
Why do Virtu, Citadel Execution Services and G1 Execution Services pay billions of dollars to the brokers in order to execute their trades? One reason is that they can use high speed trading to "front run" the orders coming from the brokers. If Schwab has a customer who places an order to buy 5,000 shares of XYX at $39.15, Virtu can go buy those 5,000 shares at 39.1338 and sell them to Schwab's customer, generating a small profit. It all happens in microseconds, and nobody really notices, especially the average retail investor. It doesn't seem like a big profit to Virtu, but if it happens 100,000 times a day, the profits to Virtu add up.
How do you know if an order is executed at the best price?
Pay for order flow is legal, but it makes you wonder how you know that Schwab or Robinhood are executing your trade at the best price.
The S.E.C. has a rule that requires brokers to execute orders at the National Best Bid and Offer, or "NBBO". The NBBO updates throughout the day with the highest and lowest offers for a security among all exchanges. The lowest ask price and the highest bid price are displayed in the NBBO and are not required to come from the same exchange. Any open orders sitting in an ATS or dark pool do not affect the NBBO.
As long as they can execute an order at or below the NBBO, brokers and/or market makers are free to execute orders in an ATS. In fact, most orders actually end up being executed at a price below the NBBO. When that happens, a trade is said to have been executed with "price improvement". For example, Schwab and Etrade both report that price improvement happens 80% to 90% of the time.
The fact that so many orders are executed with price improvement over the NBBO has raised some concern about the validity of the NBBO and the large volume of transactions happening in dark pools. An issue for the U.S. financial system going forward is how to regulate the dark pools, and whether there is enough transparency regarding ATS.
Practical tips on buying and selling
Never use market orders, as explained in our article what is a limit order. If you want some insight into how a security is currently trading, take a look at the CBOE book viewer. The term "book" refers to every open order sitting at an exchange. An offer to buy is called a "bid" and an offer to sell is called an "ask". During market hours, most orders are almost immediately executed, because the exchange matches a bid with an ask. So if you hit the "refresh" button you will notice that CBOE's book changes every second. Many of the open orders that sit in their book for a while are sitting there because they are "unrealistic" --- someone who is asking to sell for too high a price, or someone hoping to buy at too low a price.