The Trade Life Cycle Explained

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Ever wondered how on Earth all the different components and stages of a trade fit together? We start with our investors.

The investor informs the broker firm and their custodian a financial institution — usually a bank — which looks after their assets for safekeeping of the security they would like to buy, and at what price — either the market price or lower. This is called a buy order. A couple more jargon nuggets for you here: A market order is an order to buy or sell at the market prices. From this point, the order is fed down to the risk management experts in the middle office of the organisation.

Amongst other things they will check the client placing the order has sufficient stocks to pay for the security and the limits. When an order is accepted and validated by the risk management team, the broker firm sends it to the Stock Exchange….

They will also put in a sell order to their broker, stating the security they have to make available on the market and the market price how much they want to sell it for. The sell order goes through all of the necessary risk management procedures in the middle office on this side as well. All being well, it then shoots off to the exchange too…. Once the beautiful moment of a perfect match happens…. A trade is born! In order to proceed further, confirmation is necessary.

The broker on each side of the trade has checked that their client agrees with details and conditions: The exchange will also send these details to the custodian who will relay this information to the broker for confirmation. Once the trade has been confirmed by the brokers and as long as each party agrees with the details and conditions, the back office team gets to work, and the clearing house comes into play…. On the settlement date the sell side must have transferred their security and the buy side must have transferred the money for their purchase.

Finally, the glorious settlement date arrives: Back office staff are responsible for ensuring that these payments are made on time and documented and reported in the correct manner. The buy side will transfer cash for the security via the clearing house, and likewise the sell side will hand over their security.

At the end of each trade day the clearing house will provide reports on settled trades to exchanges and custodians. Like what you're reading? Thinking of getting to a career in Finance? What is your full name? All being well, it then shoots off to the exchange too… Stage six: Once the beautiful moment of a perfect match happens… Stage seven: Once the trade has been confirmed by the brokers and as long as each party agrees with the details and conditions, the back office team gets to work, and the clearing house comes into play… Stage nine: This is a digital high five.

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