Execution Friction: From Click to Fill

The first way a small account loses money before the market thesis is even tested

Course lens

How can a small retail trading account survive execution friction, drawdowns, leverage, and increasingly complex instruments?

The question this week answers

Between clicking “buy” and actually owning a share, where can execution differ from the price on screen — and why does that matter more when capital is limited?

The point is not to find a “best” trading style or instrument. It is to understand what can make the account fail.

By the end of this lecture

  1. separate the roles of broker and exchange
  2. distinguish a cash account from a margin account
  3. explain the trade-off between a market order and a limit order
  4. calculate the cost created by bid/ask spread and execution choice

Two jobs, two account types

Broker

Takes the order from the trader and routes it onward.

Exchange

Matches the order against other orders in the market.

Cash account

Can only spend capital already in the account.

Margin account

Can borrow against account equity — leverage appears in full in Week 8.

A single app can make these feel like one step. They aren’t.

Every order quotes two prices at once

Market order

Fills immediately at the best available price. Price is not guaranteed.

Limit order

Fills only at a chosen price or better. Price is guaranteed — the order might never fill at all.

The bid is the highest price a buyer currently offers; the ask is the lowest a seller currently accepts.

The quoted price is information — the executable price is what changes the account

A worked example

Simulated stock “ABC” is quoted:

bid $50.00 / ask $50.05

A student places a market buy order for 10 shares. A market buy fills against the ask — the price sellers are willing to accept right now — not the bid, and not some average of the two.

The numbers

10 shares × $50.05 ask = $500.50



Mid-price = ($50.00 + $50.05) ÷ 2 = $50.025


10 shares × $50.025 = $500.25



$500.50 − $500.25 = $0.25 — the cost of certainty

Trivial on 10 shares. It stops looking trivial once Week 7 covers paying the same spread dozens of times a day.

What the order book looks like

Ask ladder (sellers)

$50.05 · $50.08 · $50.12

Bid ladder (buyers)

$50.00 · $49.97 · $49.93

A market order reaches across the gap between the two ladders to hit the best price on the other side.

Try it yourself

Choose an order

A simulated stock is quoted bid $22.10 / ask $22.16.

Work out the cost of a 50-share market buy. Then decide: would a limit order at $22.12 suit a trader who wants price certainty more than speed — and what has to happen for it to ever fill?

The takeaway

  1. Broker and exchange are different parts of the execution chain.
  2. Market orders exchange price certainty for immediacy; limit orders do the reverse.
  3. The spread is paid before the market direction has had any chance to help.
  4. For a small account, execution quality is part of risk management, not an administrative detail.

Next week

Week 3 — how holding period changes which risks and costs dominate, from investing through swing to day trading.