What Routing and Regulation Change—and What They Do Not
A patient retail limit order does not travel directly from the customer’s screen to a final price. It passes through a broker’s handling decision and may reach a market maker, an exchange, or more than one source of liquidity. This chapter examines that handling path and the protections around it. The practical judgment is straightforward: a venue label or execution-capacity label can explain how an order was handled, but only the realized price, fill, timing, and non-execution outcome show what the customer received.
The distinction matters because routing is often treated as a verdict. An order sent to a market maker is not automatically good or bad. An order sent to an exchange is not automatically more independent or more favorable. Principal and riskless-principal descriptions identify how the counterparty or liquidity was arranged; they do not replace an assessment of the customer’s result.
The route is a path, not a verdict
The study finds a sharp difference between the handling of marketable and nonmarketable retail orders. Nearly all marketable orders—about 99.8% of orders and 99.9% of submitted shares—are routed to market makers. Nonmarketable limit orders are also usually routed to market makers, but less exclusively: about 89% of limit orders, representing roughly 87% of submitted shares, go to market makers, while the remainder is sent directly to exchanges.
That difference is consistent with the different economic tasks of the orders. A marketable order is asking for liquidity now, and a market maker can often act as the immediate counterparty. A nonmarketable limit order may need to rest, be displayed, or be matched with liquidity that appears later. Direct exchange routing is one possible path, while a market maker can also handle the order internally or seek an equivalent execution elsewhere.
The venue percentages describe routing and executed shares at different stages, so they should not be read as interchangeable. Market makers execute about 83% of the executed shares from retail limit orders in the study. This does not mean that every limit order sent to a market maker is filled there, or that an exchange receives no economic role in a market-maker execution. A market maker may source liquidity from another venue and then complete the customer’s transaction.
The order’s lifecycle is easier to follow if the stages are kept separate:
- Receipt: The broker receives the customer’s held order and classifies or handles it according to the order instruction and market conditions.
- Routing: The broker sends the order to a market maker, an exchange, or another permitted path.
- Liquidity response: A market maker may trade against the customer, locate equivalent liquidity elsewhere, or use a linked representative order to expose the customer’s interest.
- Resolution: The order fills, partially fills, remains open, is canceled, or expires. The customer’s execution quality is determined at this final stage by price, completion, timing, and the cost of whatever did not fill.
The stages are connected but not identical. A routing decision can influence the available liquidity and the chance of execution.