Overview
This lecture covers the complete life cycle of a trade, from pre-trade research to final settlement, highlighting each key stage and the entities involved.
Pre-Trade & Order Placement
- Pre-trade (trade initiation) involves investors consulting with research teams to decide trade details (stock, quantity, buy/sell).
- Investors place buy or sell orders through brokers during the order placement stage.
- Brokers input order details into their systems and seek matches on the stock exchange.
Trade Execution & Capture
- When buy and sell orders match, the trade is executed (trade execution stage) on t+0 at the front office.
- Post-execution, trade details are sent to the custodian, who safeguards financial assets.
- The trade capture team at the custodian records trade details in the system (t+0, middle office).
Trade Enrichment & Validation
- Trade enrichment (t+0, middle office) involves organizing data into trade data (stock, quantity, price, date, direction) and static data (client name, contact, settlement instructions).
- Trade validation (t+0, middle office) checks all details for accuracy.
- Confirmation or contract note is sent to the investor (confirmation stage).
Clearing & Reporting
- Stock exchange reports trades to the Clearing House for net obligation calculation (transaction reporting).
- Clearing House acts as counterparty for both buyer and seller custodians, providing counterparty guarantee.
Affirmation & Agreement
- On t+1, investors affirm trade details to custodians (affirmation stage).
- Confirmation and affirmation together form the trade agreement (t+1, middle office).
Clearing Member Interaction & Settlement Instructions
- On t+2, Clearing House contacts clearing members, who interact with custodians to confirm trade details (back office).
- Clearing House sends settlement instructions to the depository, which maintains pooled custodian accounts (settlement instruction stage).
Settlement & Ownership Transfer
- On t+3, actual settlement occurs: shares and cash are transferred between buyer and seller custodians (settlement stage, back office).
- Ownership of securities officially changes hands.
Key Terms & Definitions
- Pre-trade/Trade Initiation — The stage where investment decisions are made.
- Order Placement — Submitting buy/sell instructions to the broker.
- Trade Execution — Matching and completing a trade on the exchange.
- Custodian — Entity safeguarding investor assets and records.
- Trade Capture Team — Team recording trade details in the system.
- Trade Enrichment — Organizing data as trade or static data.
- Clearing House — Calculates what each party owes and provides counterparty guarantee.
- Clearing Member — Intermediary between Clearing House and custodians.
- Depository — Maintains pooled accounts for custodians and facilitates settlement.
- Settlement — Final exchange of securities and cash, transferring ownership.
Action Items / Next Steps
- Review each step and entity involved in the trade life cycle.
- Understand the distinction between trade data and static data.
- Prepare for possible exam questions on trade life cycle stages and responsibilities.