Market Microstructure: Order Types, Spreads and Execution

Every trading system in this knowledge base is tested on prices. Every one of them is paid in fills. The difference between the two is execution cost: the bid–ask spread, the market impact of the trader's own orders, fees and rebates, and what the price did while the order was waiting. For a long-term investor it is a rounding error. For a high-turnover system it is often the whole edge (08; Appendix A of the main book computes cost drag by turnover). The rules that decide where an order goes are set in the United States by the SEC's Regulation NMS, adopted in June 2005 and fully phased in by October 2007 (SEC releases). The minimum price increment is set by decimal pricing, completed for exchange-listed stocks and options on 29 Jan 2001 and for Nasdaq on 9 Apr 2001 (SEC). The venues are now numerous. The SEC's staff counted 18 US options exchanges operating as of April 2026, with IEX Options and a second MEMX options venue expected (SEC staff paper, Apr 2026; Cboe). They cleared a record ~15.2bn options contracts in 2025 (OCC; Shared facts). Retail orders mostly do not reach an exchange first. In 2022 brokers sent more than 90% of marketable retail orders in US-listed stocks to six wholesalers, with Citadel Securities taking the largest share, ~41% (Congressional Research Service, Feb 2024, citing SEC data). The wholesalers pay brokers for that flow, and retail options orders earn brokers the most: Robinhood reported $314m of options transaction revenue in Q4 2025 against $94m from equities (company release, 10 Feb 2026). The SEC's 2022 proposals to force retail orders into auctions (the Order Competition Rule) and to create a federal best-execution rule (Regulation Best Execution) were formally withdrawn in June 2025 (SEC withdrawal notice; law-firm summaries). Above all of this sits the physics of liquidity. Across markets and decades, the price impact of a large order grows roughly with the square root of its size relative to volume, not in proportion to it (Almgren, Thum, Hauptmann and Li, Risk, 2005; Tóth et al., Physical Review X, 2011). This section explains order books, spreads and the NBBO, order types, maker–taker fees and payment for order flow, options auctions and the US options exchanges, market impact and the square-root law, implementation shortfall, dark pools and tick sizes. The companion worked example prices a stylized order of 2% of a stock's daily volume executed four different ways.