There’s a well-oiled infrastructure machine which carries literally trillions of trades every day through the trade life cycle.
Here are 9 stages of the trade life cycle.
1. The Order
The buyer tells the broker firm and its custodian in a trade lifecycle. It is a financial entity which usually a bank that takes charge of their investments for safekeeping of the security they would like to purchase. Then, at what price, either the market price or lower.
In other words, it is a buy order.
2. Front Office Action
The investor’s order is issued by the trading firm’s front office selling traders. From this point the order is fed to the middle office of the organisation’s risk management experts. Then the sales traders ‘execute’ order.
3. Risk Management
A number of checks and calculations will be carried out by the risk management team to see if the level of risk involved with the client’s order means it is still safe to accept and proceed to the next stages.
In addition, among other items they must verify if the customer placing the order has enough supplies to pay for the protection and the limits.
4. Off to the Exchange
After the risk management team validated it, the broker firm then sends it to the stock exchange.
In this side as well, the sale order goes through all the requisite risk control procedures in the middle office.
5. Match Making
The exchange has to find the match between buying order and selling order from a safe. Once the perfect match happens, beautiful moment.
6. Trade Made
The exchange returns trade information to the brokers for confirmation, as well as trade details to the custodian of the investor. The front office selling department of traders will then notify their clients of the trade.
Confirmation is necessary. In either side of the exchange, the broker has confirmed whether their client agrees with the terms and conditions: specifics of which protection is being exchanged, how much it is being sold for and the date of settlement.
The exchange will also give these reports to the custodian, who will pass this information on for confirmation to the broker.
If the brokers approve the transaction and as long as each side agrees with the terms and conditions, the back office department will get to work and the clearing house will come into action.
8. Clearing Begins
The clearing house will make all of the necessary calculations for the buy side and the sell side of the trade in order to determine what’s needed from each of them and by when. It’s their job to make sure all of the obligations are fulfilled.
Finally, there comes the glorious settlement date: money transfer and security. This is the duty of back office teams. It aims to ensure that transfers are received on schedule, recorded, published in the appropriate manner.
The transfer doesn’t take place directly between the trading parties: the clearing house will have accounts for each side of the trade and facilitate the transfer.