Exchanges, Brokers and Clearing: Who Does What in a Trade

Before you read: How Markets Work: Bids, Asks, Spread and Liquidity

What you will learn

• What an exchange, a broker and a clearinghouse each do.
• How an order travels from a trading screen to a completed trade.
• Which US organizations oversee each part, in general terms.

What does an exchange do?

Where do buyers and sellers actually meet?

An exchange runs a marketplace with published rules. Its matching engine pairs buy and sell orders under the exchange’s published matching rules: best price first and then, often, time priority (first in, first out). Some products instead share same-price fills pro rata or by a hybrid rule; see Reading the DOM Honestly: Spoofing, Icebergs and Hidden Size. The exchange also publishes trades and quotes and lists the products that can trade there, such as stocks, futures or options. Most individuals cannot send orders to an exchange directly. They reach it through a member firm.

What does a broker do?

Why does an order pass through another company first?

A broker accepts orders from customers, checks them against account balances and risk limits, and routes them to an exchange or another trading venue. It holds customer cash and positions, sends statements and confirmations, and reports to regulators. In futures, the firm holding customer funds is called a futures commission merchant. Some brokers route stock orders to wholesalers rather than exchanges, a topic covered in How a Stock Trades: Exchanges, Market Makers and Auctions.

Order path diagram

Illustrative diagram constructed for teaching. Not real market data.

The diagram shows four boxes from left to right: customer, broker, exchange and clearinghouse. Arrows show an order going out, a fill coming back and the clearinghouse standing between the two sides after the match. That reduces counterparty risk; it does not remove every risk, and the customer still depends on the broker that clears for them. Labels are generic.

What does clearing do?

After a trade matches, who makes sure both sides pay and deliver?

A clearinghouse stands between the two sides of a trade once it is matched, becoming the buyer to every seller and the seller to every buyer. This is called novation. It collects margin, marks positions to market and manages a member default. For stocks, trades then go through settlement, the transfer of cash and shares, on a set schedule.

Who oversees each part?

If something goes wrong, which body sets the rules?

In the United States, the SEC oversees securities markets and FINRA oversees broker-dealers. The CFTC oversees futures markets and the NFA is the self-regulatory body for futures firms. Each publishes rules and free lookup tools. Other countries have their own regulators.

What this does not tell you about market structure

• How any particular broker routes orders or holds funds. Read its disclosures.
• Whether any firm is suitable or safe for anyone.
• Every rule. Regulators’ own sites are the primary source.
• Nothing here recommends any firm, product or trade.

Watch the lesson explained

Check yourself

1. What does a matching engine do? Hint: price first, then the venue’s allocation rule, often time.
2. Why can a trader rely on the other side of a futures trade without knowing who it is? Hint: novation.
3. Which US bodies oversee securities brokers and futures firms? Hint: two pairs.

Last reviewed November 8, 2026. Spotted a mistake? Report an error.