Trade Life Cycle of Equities
Steps involved in Life Cycle of a Trade for US Market
Generally, these are the steps followed in a Trade Life Cycle, however, it can slightly differ based on the Market or bulk trade
1.Pre-Trade or Trade initiation stage:
This is the stage where investor will get in touch with the Research team and decide if he would like to a buyer or a seller and the quantity to invest in. It happens on T+0 day at the Front Office level. Front office level deals with collection of data from the client for the smooth settlement of trade.
2.Order initiation stage (T+0, Front Office level):
Once the investor decides to buy or sell, he will contact his broker and initiate the order, wherein, he will pass on all the details to the investor like the name of the stock, quantity, price at which he would be interested to buy or sell (limit order, market order).
3.Trade Execution stage (T+0, Front Office):
Broker will key-in all the details into his platform and it will find the right match. Example, if investor wants to buy Facebook at $200; system check if there is a seller willing to sell at $200 or below. If anybody is willing to sell at this price, system will find the match. Once, it gets the right match, order will be placed. This is called Trade execution stage.
4.Trade Capture stage (T+0, Middle Office level):
Once trade gets executed, Broker will pass-on all the trade details to the Custodian. Custodian is also called as Depository Participant (DP) in India. Custodian comes out of the word Custody, which means safeguarding. Here, it refers to safeguarding investors financial assets through record-keeping investor’s transactions. Typically, large brokers take the license of Custodian and play the role of Custodian as well. Most of the foreign Investment Banks like JP Morgan, BNYMellon, Goldman Sachs etc. play the role of Custodian in India. It happens on T+0 day at the Middle Office level. Once date is collected at the Front Office level, it is further enriched or organized properly so that it can be used for the smooth settlement. This is where Middle-Office comes into play.
With-in the Custodian, there are many teams. Trade Capture is the Team which captures all the trade details given by the broker and updates into the system.
5.Trade Enrichment (T+0, Middle Office level):
Once trade details are keyed into the system. It goes to the next step called as Trade Enrichment. Under Trade Enrichment, data received from the Trade capture team is classified into Trade Data and Static Data. Trade Data includes those data which are specific to the trade; examples like Name of the stock, Quantity, Price, Date of the trade, Direction – Buy/Sell. Static Data includes those data which will not change from trade to trade, which are static. Examples are Name of the client, Contact details – Phone no, address and SSIs. SSI stands for Standard Settlement Instructions. It includes Bank details, Currency of Settlement and Country of Settlement.
6.Trade Validation/Verification stage (T+0, Middle Office level):
After trade validation, it goes to the next stage called as Trade Validation, wherein, all the Trade Data and Static Data will be cross-checked again and checked if the buyer actually has enough money to buy or if the seller actually has enough shares to sell. If any issue found, investor is contacted.
7.Trade Confirmation (T+0, Middle Office level):
After Trade Validation, contract note is sent to the buyer and the seller. Contract note will have all the details of the trade placed by the investor. This stage is called as Trade Confirmation stage.
8.Transaction Reporting (T+0, Middle Office level):
By the end of the day, Stock Exchange will report all the trade details to the Clearing House. Clearing House acts as the Central Counterparty for both the buyer and seller. It takes the counterparty guarantee. NSCCL acts as the Clearing House in India.
9.Affirmation (T+1, Middle Office level)
Investor gets a day’s time to look at the contract note and check if the trade took place as they wanted. It happens on T+1, Middle office level. If the investor okays the trade and informs to the Custodian, it is called as Affirmation. This is the only step that happens on T+1. In India, it happens on T+0.
10.Clearing (T+2, Back Office level)
When the data have been already pulled from the client (Front office level work) and organized (Middle-Office level), Back-Office team comes into play to execute the request given by the client.
Clearing refers to finding the net obligation for the counterparties involved in the trade. Clearing is a process through which Clearing House will coordinate with Clearing Members and find out which investor owes how much in terms of shares and amount. Clearing House will connect with the Clearing Member which in turn will connect with the Custodian and confirm the deal details to cross verify the shares and amount owed by the investors.
11.Settlement Instructions (T+2, Back Office level):
Clearing House will pass on settlement instructions to the Depository. This settlement instructions will have the details about the no. of shares to be debited/credited in the Custodian’s account. Depository is an entity which does the work of safeguarding Custodians financial assets. It maintains the pooled account of the Custodians. NSDL and CDSL are two Depositories in India. In US, DTCC acts as both Clearing House and Depository.
12.Settlement (T+3, Back Office Level):
On T+3 morning, settlement takes place. Settlement refers to transfer of ownership of shares. Custodian’s pooled account will be debited and credited with shares by the Depository.
Simultaneously, Buyer’s Custodian will also credit shares and seller’s custodian with debit shares.
13.Reconciliation: Post trade settlement, reconciliation work begins.