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The Life of an Order Explained: What Happens After You Hit Buy? | Canadian Investing · How Canadian Markets Work

• 0:00
  The $80 price tag on your trading screen is,
• 0:03
  well, it's basically an illusion. Yeah, it really
• 0:06
  is. It's just this historical snapshot of a past
• 0:09
  reality. And the exact moment you try to touch
• 0:12
  it, you know it changes. So welcome to today's
• 0:15
  Deep Dive. We are opening up a really fascinating
• 0:18
  stack of notes on the hidden inner workings of
• 0:20
  Canadian financial markets. Which is, that's
• 0:23
  a topic a lot of people think they understand,
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  but the mechanics are wild. Completely wild.
• 0:27
  And our mission today is to essentially slow
• 0:30
  down time for you. We are going to look at the
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  exact millisecond by millisecond journey of a
• 0:35
  stock order. We want to uncover all that invisible
• 0:37
  plumbing that dictates what actually happens
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  in the digital ether between the moment you press
• 0:43
  buy and the moment your order is actually filled.
• 0:46
  Right, because that journey is far more complex
• 0:48
  and frankly perilous than most investors realize.
• 0:52
  I mean, pressing that button sets off this massive
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  chain reaction across multiple systems. Oh, for
• 0:57
  sure. You've got algorithmic routing networks,
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  matching engines, all of it operating in literally
• 1:02
  fractions of a heartbeat. And they're constantly
• 1:04
  weighing these competing priorities that you
• 1:06
  never even see on your screen. And to really
• 1:08
  ground this in reality, we have to start with
• 1:10
  this highly relatable frustration. It's something
• 1:13
  almost everyone who has ever traded a stock has
• 1:16
  probably experienced. Oh, yeah. The four cent
• 1:18
  mystery. Exactly. So you look at a stock on your
• 1:21
  screen, the price says $80. You press buy for
• 1:25
  500 shares. But then a few seconds later, your
• 1:28
  confirmation screen pops up and it says your
• 1:30
  average cost was $80 and four cents. Right. Which
• 1:34
  is I mean, that's a $20 difference on the total
• 1:36
  trade. It's not going to bankrupt you, but it
• 1:37
  is just incredibly irritating. So OK. Let's unpack
• 1:41
  this. How does that happen when you are looking
• 1:43
  right at the $80 price tag when you clicked your
• 1:46
  mouse? Well, it's easy to forget that a quote
• 1:48
  on a screen isn't like a locked -in price. It's
• 1:50
  just a historical snapshot. Right. It's looking
• 1:53
  backward. Exactly. It's essentially a photograph
• 1:55
  of the market taken milliseconds ago. To really
• 1:58
  visualize this, we need to briefly break down
• 2:00
  what that quote actually represents. It's showing
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  you the best bid and the best ask at that specific
• 2:07
  moment. Okay. So the bid is the highest price
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  any buyer is currently willing to pay. And the
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  ask, which is obviously what you care about when
• 2:15
  you are buying, is the lowest price any seller
• 2:18
  is currently willing to accept. Right. But that
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  photograph is not a promise. And it certainly
• 2:23
  isn't reserved for you just because you happen
• 2:25
  to be looking at it on your screen. And crucially,
• 2:27
  depending on the data feed you are using, that
• 2:29
  snapshot might be surprisingly incomplete. Very
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  much so. Even with a real -time feed, most retail
• 2:35
  platforms only show you the top. of the order
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  book. They show you the best price available,
• 2:39
  but they do not show you the volume. Right. The
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  depth is totally hidden. Yeah. So you might see
• 2:45
  an ask of $80, but there might only be, say,
• 2:49
  10 shares actually sitting on the shelf at that
• 2:51
  price. When you are trying to buy 500 shares,
• 2:54
  that missing volume data is the absolute crux
• 2:57
  of this whole 4 -cent mystery. Exactly. And to
• 3:00
  solve that mystery mathematically, we really
• 3:03
  have to trace your order's exact path from the
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  very beginning. So, the first stage happens in
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  the milliseconds right before your order even
• 3:12
  hits the public market. We call this the validation
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  phase. I always think of this step as like an
• 3:18
  automated bouncer at a nightclub. That's a perfect
• 3:20
  way to picture it. Because before you can even
• 3:22
  get near the dance floor, this digital bouncer
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  grabs your order and strictly enforces the house
• 3:27
  rules. Like, do you actually have the buying
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  power in your account to cover this trade? Is
• 3:32
  the ticker symbol even valid or did you, you
• 3:34
  know, make a typo? Right. Are there any specific
• 3:36
  trading restrictions on your account. Exactly.
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  And this all happens in microseconds, but it
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  is a rigid gate. If you have miscalculated your
• 3:45
  cash and you try to buy more than you can afford,
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  the bouncer just rejects your order instantly.
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  You do not get into the club. But assuming you
• 3:52
  do pass the bouncer, the journey immediately
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  hits a fork in the road. This is the routing
• 3:57
  phase. And most people just assume that if they're
• 3:59
  buying a Canadian stock, their order just goes
• 4:02
  straight to the Toronto Stock Exchange. Right.
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  The TSX. Yeah. but Canada has a highly fragmented
• 4:07
  market structure. There are actually multiple
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  alternative marketplaces and exchanges all trading
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  the exact same securities simultaneously. So
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  once you're past the bouncer, your order goes
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  to the market. But the market isn't just one
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  place. It's a whole street of clubs, and they're
• 4:23
  all playing the exact same music. Right. And
• 4:25
  your brokers' algorithms have to instantly decide
• 4:27
  which of those clubs to send your order to. Now
• 4:30
  they have a regulatory obligation to seek best
• 4:33
  execution for you. But whenever there are routing
• 4:36
  choices in finance, there are usually, well,
• 4:39
  structural friction points. So let's dig into
• 4:42
  the conflict of interest here. Because brokers
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  have financial incentives to send orders to specific
• 4:47
  venues, right? Yes. This raises an important
• 4:49
  question about market plumbing. Best execution
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  is not just a simple mandate to find the absolute
• 4:55
  lowest price. It's this nuanced balancing act.
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  Regulators actually require brokers to weigh
• 5:01
  price, speed, the certainty that the execution
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  will happen, and the overall cost of the trade.
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  OK. And that last factor, the overall cost, is
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  where the broker's own financial realities kind
• 5:13
  of collide with your trade. Wait, so how does
• 5:17
  that tension mechanically work behind the scenes?
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  Like, how does a broker make money off routing?
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  Well, it really comes down to fee structures,
• 5:24
  specifically the maker -taker model that a lot
• 5:27
  of exchanges use. So exchanges want to attract
• 5:30
  liquidity. They want people posting orders on
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  their books. Makes sense. So they will often
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  pay a rebate to the participant who makes or
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  provides that liquidity, and they will charge
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  a fee to the participant who takes or removes
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  that liquidity. Oh, I see. So when you submit
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  a market order to buy immediately, you are taking
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  liquidity. Your broker has to pay a fee to the
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  exchange to execute that trade but different
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  exchanges charge different fees and Some even
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  use inverted models where they might actually
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  pay the broker a rebate for bringing that taker
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  order to their venue Okay, so this means there
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  is a live ongoing tug -of -war between routing
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  the order to the absolute cheapest path for the
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  brokers bottom line and Finding the absolute
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  best execution for you the client exactly Now,
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  it is heavily monitored and regulated by compliance
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  departments, but that friction is literally baked
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  right into the architecture of the system. Right.
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  And the outcome requires algorithmic judgment,
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  which inherently means that two different brokers
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  might route the exact same order in slightly
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  different ways. OK, so let's follow the order
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  past that routing decision. The broker has navigated
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  the fees. They've picked a destination. The order
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  finally hits the matching engine. It arrives
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  at the public order book. Here we go. And this
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  is the exact moment where that initial $80 versus
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  $80 .04 mystery is mathematically solved. We
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  can actually look at the numbers from the sources.
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  Yes. This is where theory meets the reality of
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  supply and demand. So your order for 500 shares
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  hits the book. The matching engine looks at the
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  ask side, the sellers. It turns out there are
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  exactly 200 shares being offered by sellers out
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  there at exactly $80. OK. but that is the entire
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  supply at that specific price point. The next
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  available batch of shares, let's say there are
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  300 of them just sitting there, are being offered
• 7:23
  by sellers who are demanding $80 .05. Okay, and
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  because you submitted a market order, meaning
• 7:29
  you instructed the broker to prioritize speed
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  and just buy the shares right now at whatever
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  the going rate is, the matching engine just becomes
• 7:35
  this hungry machine. Right. It just wants to
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  fill the order. So it eats up those 200 cheap
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  shares at $80, but your order isn't satisfied.
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  You still need 300 more shares. So the machine
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  simply climbs up the ladder to the next available
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  price on the shelf. It forces you to buy those
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  remaining 300 shares at the higher price of $80
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  .05. Exactly. And when you blend that mathematical
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  reality together, taking 200 at $80 and 300 at
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  $80 .05, your average cost comes out to exactly
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  $80 .03. Ah, there it is. Yep. Add in a tiny
• 8:09
  bit of real -world transactional friction or
• 8:12
  fractional rounding within the clearing process,
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  and your confirmation receipt spits out $80 .04.
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  Here's where it gets really interesting. This
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  reveals a core market dynamic that honestly every
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  investor needs to internalize. You got a worse
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  price on the second half of your order precisely
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  because you bought the first half. Yes. Your
• 8:31
  own order consumed the available supply and actively
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  moved the price against you. This is market impact.
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  People tend to visualize the market as this infinite
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  ocean of shares available at the quoted price,
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  but it's actually a shallow pool. And when you
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  jump in with a large order, you displace the
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  water. That's a great analogy. Institutional
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  investors actually spend millions of dollars
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  on sophisticated algorithms designed entirely
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  to hide their market impact. They slice massive
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  orders into tiny pieces over days or even weeks.
• 9:00
  Right, to avoid making a splash. Exactly. Retail
• 9:03
  investors, on the other hand, often just click
• 9:05
  buy and absorb the impact all at once. Now, for
• 9:09
  a 500 -share order of a massive, highly liquid
• 9:11
  stock like a major Canadian telecom or a bank,
• 9:14
  market impact is just that 4 -cent annoyance.
• 9:17
  The pool is deep enough that your splash barely
• 9:20
  registers. But… But… Apply that exact same matching
• 9:24
  engine logic to an illiquid stock, and the outcome
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  is absolutely devastating. Yeah, this takes us
• 9:30
  right into the danger zone. The sources outline
• 9:32
  a scenario on the venture exchange that really
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  illustrates this perfectly. So instead of a shallow
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  pool, think of an illiquid market like trying
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  to buy 500 tickets to a sold out concert from
• 9:42
  scalpers outside the venue. OK, I like this.
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  You look at your screen and the quoted price
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  for the small cap stock is $4. You put in a market
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  order for 500 shares. And because it's a thin
• 9:53
  market, there is very little volume resting on
• 9:55
  the order book. Right. So you walk up to the
• 9:57
  first scalper, and he has 50 shares at $4. You
• 10:00
  buy them. But he's out. To get the rest of your
• 10:02
  shares, you have to walk further down the street.
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  The next scalper has 100 shares, but he wants
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  $4 .10. Ouch. The guy next to him has 200 shares,
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  but he is demanding $4 .50. And beyond him, there
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  is absolutely no one else selling until you hit
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  the $5 mark. And remember, the market order instruction
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  is absolute. You told the system to fill the
• 10:23
  order regardless of cost. Right. So the matching
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  engine dutifully marches down the street. It
• 10:28
  eats the 50 shares at four, the 100 at 410, and
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  the 200 at 450. It still needs 150 more shares
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  to complete the lot. So it reaches way up the
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  ladder and buys the final block at $5 each. It's
• 10:40
  crazy. You wanted a stock you thought was trading
• 10:42
  at $4. But your average cost across the whole
• 10:45
  execution turns out to be $4 .40. That is a 10
• 10:49
  % invisible tax you paid simply for using the
• 10:51
  wrong order type in a thin market. Because you
• 10:54
  traded certainty of price for certainty of execution.
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  In a liquid market with tight spreads, that trade
• 10:59
  -off is usually fine. But the moment you step
• 11:02
  into something thin, you absolutely must flip
• 11:05
  that priority using a limit order. Right. Because
• 11:07
  a limit order changes the instruction entirely.
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  You are telling the broker, I care about the
• 11:13
  price more than I care about actually getting
• 11:15
  the shares. In that concert scalper scenario,
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  if you set your limit order at $4 .10, you are
• 11:22
  drawing a hard, impenetrable line in the sand.
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  Mechanically, the engine eats the 50 shares of
• 11:28
  $4. It takes the 100 shares at 410, and then
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  it abruptly halts. It just stops? It just stops.
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  Because the next available shares are at 450,
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  which violates your limit, the engine stops matching.
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  You secure 150 shares at excellent prices, And
• 11:45
  the remaining 350 shares of your order just rest
• 11:47
  on the book. Unfilled. Broadcasting to the market
• 11:50
  that you were a willing buyer, but only at 410
• 11:54
  or better. Now, I can hear the frustration from
• 11:56
  people who just want to buy their full position
• 11:59
  and go on with their day. Seeing a partially
• 12:01
  filled order can feel like the system is broken.
• 12:05
  But doesn't that mean my order might just sit
• 12:07
  there forever? It might. But we really need to
• 12:10
  reframe how we view that. An unfilled order is
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  not a loss or a failure. It is an outcome you
• 12:17
  actively chose. It's a protective boundary doing
• 12:20
  exactly the job you hired it to do. Okay, that
• 12:23
  makes a lot of sense. It requires discipline,
• 12:26
  though. If the stock runs away and you never
• 12:28
  get those remaining shares, you still retain
• 12:30
  total control. You can always go into your account,
• 12:34
  reassess the situation, and raise your limit
• 12:36
  price if you truly want the position. What you
• 12:39
  absolutely cannot do is unbuy a $4 stock that
• 12:43
  you accidentally paid $5 for. So true. Once a
• 12:46
  market order executes and sweeps the book, the
• 12:48
  capital is gone. Wow. Okay, so we have survived
• 12:52
  the mechanics of the public order book, but this
• 12:54
  assumes your order even makes it to that public
• 12:57
  street of scalpers or the main exchange. The
• 13:00
  plumbing gets incredibly opaque here, even for
• 13:02
  seasoned traders, because a massive chunk of
• 13:04
  these orders never actually leave the broker's
• 13:06
  building. The sources dive into a complication
• 13:09
  called internalization. This is a major structural
• 13:13
  reality of modern trading. When you hit buy,
• 13:17
  your broker's routing algorithm might decide
• 13:19
  not to send your order to the TSX or any public
• 13:22
  venue. Instead, they internalize the trade. Meaning
• 13:25
  they keep it in -house. Exactly. They fill your
• 13:28
  order by matching it internally against their
• 13:30
  own proprietary inventory of shares, or they
• 13:32
  cross it against a sell order from another one
• 13:34
  of their own retail clients. The entire transaction
• 13:37
  executes inside a closed loop. So why do they
• 13:41
  do this? I have to assume it comes back to the
• 13:43
  fee structures we talked about earlier. Oh, it
• 13:45
  absolutely does. By crossing the trade internally,
• 13:48
  the broker bypasses the public exchange entirely,
• 13:51
  which means they don't have to pay those taker
• 13:53
  fees we discussed. Sneaky. Furthermore, they
• 13:56
  can often capture a fraction of the bid -ask
• 13:58
  spread for themselves. Now, regulations stipulate
• 14:01
  that if they internalize your trade, they generally
• 14:05
  have to provide you with a slight price improvement
• 14:07
  over the public quote, or at least match the
• 14:09
  best available price. So you might get a fraction
• 14:12
  of a cent better deal. But the macro consequence
• 14:15
  is that your order never interacted with the
• 14:17
  public order book. It never contributed to the
• 14:19
  public discovery of price. And we'll circle back
• 14:22
  to why that matters in a moment. But first, I
• 14:24
  want to touch on order protection. If I'm using
• 14:27
  a limit order and brokers are dealing with all
• 14:29
  these different venues and internal systems,
• 14:31
  what stops a broker from giving me a terrible
• 14:34
  fill just because it's cheaper for them? Like
• 14:36
  how does speed and algorithmic trading play into
• 14:39
  protecting my order? So for a standard retail
• 14:42
  order, the microsecond speed advantage of high
• 14:44
  frequency trading isn't really what makes or
• 14:46
  breaks your trade. What matters is a regulatory
• 14:50
  framework in Canada called the Order Protection
• 14:52
  Rule. Okay. It is a genuine safety net. The rule
• 14:55
  is essentially designed to prevent trade -throughs.
• 14:58
  Meaning my broker can't execute my trade at an
• 15:01
  inferior price on one venue if a better price
• 15:03
  is actively flashing on a neighboring venue.
• 15:06
  Precisely. If your broker routes you to venue
• 15:08
  A, where the ask is $80, But venue B is simultaneously
• 15:13
  offering shares at $79 .95. The automated systems
• 15:16
  are required to route around the inferior price
• 15:19
  and secure that $79 .95 for you. Oh, wow. That's
• 15:23
  actually really good. It is. Now, order protection
• 15:26
  does not magically eliminate market impact. If
• 15:29
  your order is large enough, you will still eat
• 15:31
  through the combined books across venues. But
• 15:33
  it guarantees you aren't being systematically
• 15:36
  gouged by poor routing choices when a better
• 15:38
  deal is publicly available. That is surprisingly
• 15:42
  reassuring. So we've covered the where and the
• 15:45
  how, but there's a crucial when outlined in the
• 15:48
  sources, the morning chaos. I assume the extreme
• 15:51
  volatility right at the 930 a .m. opening bell
• 15:54
  is basically a bottleneck of overnight news and
• 15:57
  queued up breakfast orders all trying to squeeze
• 15:59
  through the door at the exact same time. That
• 16:01
  is exactly what creates the bottleneck. And the
• 16:04
  mechanics of how the market handles that bottleneck
• 16:06
  are fascinating. Because the market has been
• 16:09
  closed for over 15 hours, a massive imbalance
• 16:12
  of buy and sell orders has built up. To resolve
• 16:15
  this, exchanges run what is called the morning
• 16:17
  cross or an opening auction. It's a really complex
• 16:22
  algorithmic process that calculates a single
• 16:25
  clearing price designed to execute as many of
• 16:28
  those queued up orders as possible the moment
• 16:30
  the market opens. But once that initial cross
• 16:32
  happens and the bell rings, it doesn't just instantly
• 16:35
  smooth out into a normal trading day, does it?
• 16:38
  No, not at all. The immediate aftermath is highly
• 16:41
  volatile. Market makers, the institutional firms
• 16:45
  whose job is to provide liquidity by constantly
• 16:47
  offering to buy and sell, they are very cautious
• 16:50
  in those first few minutes. They do not want
• 16:52
  to get run over by toxic overnight flow or massive
• 16:56
  institutional shifts reacting to an earnings
• 16:58
  report. Makes sense. So mechanically, they widen
• 17:01
  their spreads. The gap between the bid and the
• 17:04
  ask expands dramatically, and price discovery
• 17:07
  swings wildly until the buying and selling pressure
• 17:10
  finds an equilibrium. Which means if you send
• 17:13
  a market order into that environment at 9 .31
• 17:16
  a .m., you are basically asking for maximum market
• 17:19
  impact in a moment of minimum liquidity. If we
• 17:22
  connect this to the bigger picture, it's just
• 17:24
  a bad idea. Yeah. The takeaway here is incredibly
• 17:28
  straightforward. If you are a long -term investor,
• 17:31
  buying a stock you plan to hold for five years,
• 17:33
  there is absolutely zero reason for you to dive
• 17:36
  into that morning bottleneck. Just wait an hour.
• 17:39
  Let the morning cross settle. Let the market
• 17:41
  makers tighten their spreads back up. Let the
• 17:43
  pricing stabilize. Waiting that one hour cost
• 17:46
  you absolutely nothing, and it systematically
• 17:48
  protects you from getting caught in a massive
• 17:50
  temporary price spike. It really is the easiest,
• 17:53
  most actionable way to protect your capital without
• 17:56
  needing a degree in market microstructure. So
• 17:59
  what does this all mean? If we zoom out from
• 18:01
  the matching engines and the routing algorithms,
• 18:03
  what is the ultimate toolkit you should walk
• 18:05
  away with today? I think we can distill this
• 18:08
  entire deep dive into four critical takeaways.
• 18:11
  Number one, the screen price is a quote, not
• 18:14
  a reservation. It is a historical snapshot that
• 18:17
  rarely shows you the true volume sitting behind
• 18:20
  the price. Right. Number two, if you place a
• 18:23
  large order, you are going to eat through the
• 18:25
  order book. You will fill at progressively worse
• 18:27
  prices. That is market impact. and it is a self
• 18:31
  -inflicted wound. Number three, market orders
• 18:34
  trade price certainty for execution certainty.
• 18:37
  That is fine for massive, highly liquid stocks,
• 18:40
  but it is incredibly dangerous for thin, small
• 18:42
  -cap stocks where scalpers control the street.
• 18:45
  And number four, an unfilled limit order is not
• 18:48
  a failure. You cannot un -buy a bad price. An
• 18:52
  unfilled order is the exact protective boundary
• 18:55
  you asked for. Those principles will absolutely
• 18:57
  save you significant capital over a lifetime
• 19:00
  of investing. But before we sign off, I do want
• 19:02
  to leave you with something to mull over regarding
• 19:05
  internalization. We discussed how brokers match
• 19:08
  retail orders internally to save fees, shielding
• 19:11
  those trades from the public exchange. Right,
• 19:14
  the invisible trading. Think about the long -term
• 19:17
  systemic implication of that. The public quote
• 19:20
  you see on your screen, that $80 price tag, is
• 19:23
  supposed to represent the true intersection of
• 19:25
  public supply and demand. But if millions of
• 19:28
  retail trades are systematically removed from
• 19:30
  the visible market and executed in the dark,
• 19:34
  they stop interacting with the public order book.
• 19:38
  Okay. So if the visible market is constantly
• 19:41
  losing volume to private internal pools, how
• 19:44
  might that invisible trading eventually warp
• 19:46
  the accuracy of the public quote? If everyone
• 19:49
  is swimming in private pools, is the depth of
• 19:52
  the public pool truly representative of reality
• 19:54
  anymore? Man, that is a genuinely unsettling
• 19:57
  thought to carry forward. It suggests that the
• 20:01
  $80 anchor we started this whole journey with
• 20:03
  might become even less reliable as the underlying
• 20:06
  plumbing continues to evolve in the dark. Yeah,
• 20:09
  something to think about. For sure. Thank you
• 20:11
  for joining us on this custom -tailored deep
• 20:13
  dive. Mastering these hidden mechanics is the
• 20:16
  ultimate shortcut to being a truly informed market
• 20:19
  participant. The next time you look at a stock
• 20:21
  and the screen says $80, you won't just see a
• 20:24
  price tag. You'll know exactly what is waiting
• 20:26
  for you beneath the surface.