IB Career Coach

Trade Life Cycle

Description: This is the beginning of the trade process, where a decision is made to buy or sell a financial instrument. This step involves communication between the front office (traders, portfolio managers) and the market.
- Order Types: Market orders, limit orders, stop-loss orders.
- Example: A portfolio manager might decide to purchase 1,000 shares of Apple because of favorable earnings reports. This is captured in the Order Management System (OMS).
- Order Placement: The order is communicated to a broker or directly routed to an exchange.

Description: The order is executed on a trading platform or exchange at the best available price.
- Execution Venues: Trades can be executed on centralized exchanges like NYSE, NASDAQ, or through over-the-counter (OTC) markets where brokers directly negotiate trades.
- Execution Methods:
  - Manual Execution: A trader directly places orders in the market.
  - Algorithmic Trading: Orders are automatically executed based on algorithms designed to optimize the price, timing, or quantity of the trade.
  - High-Frequency Trading (HFT): Automated trades executed at extremely high speeds, often based on real-time market conditions.
- Technology: Execution Management Systems (EMS) handle the routing and execution of orders. They integrate with exchanges and are often optimized for speed and accuracy.
- Example: The trader's buy order for 1,000 Apple shares is executed at $180 each on the NYSE.

Description: After the trade is executed, all details related to the trade (price, quantity, security, and counterparty) are recorded in internal systems.
- Systems Involved: The trade is booked into a trade capture system or front-office system. This ensures that the trade is stored in a database and can be further processed downstream.
- Data Involved:
  - Trade date: The date the transaction was executed.
  - Quantity: Number of shares or bonds involved.
  - Price: The execution price.
  - Security identifier: ISIN, CUSIP, ticker symbol.
  - Counterparty: The firm on the other side of the trade.
- Example: The trade for 1,000 shares of Apple at $180 is recorded in the firm's internal system.

Description: Enrichment is the process of adding additional information to the trade to prepare it for further processing. This includes adding settlement instructions, regulatory reporting data, broker details, and more.
- Purpose: Enrichment ensures that the trade is correctly processed downstream, such as in settlement, compliance reporting, or risk analysis.
- Data Added:
  - Settlement Instructions: Where the securities and cash will be delivered.
  - Regulatory Data: Information required for compliance with regulations like MiFID II or Dodd-Frank.
  - Broker Information: Details of the broker handling the trade.
- Example: The trade information for 1,000 Apple shares is enriched with the settlement details (e.g., "settle in 2 business days" for equities) and relevant regulatory codes.

Description: Validation checks the accuracy of the trade by verifying the information against internal and external systems. The goal is to ensure there are no errors before the trade proceeds to confirmation.
- Types of Validation:
  - Price Check: Verifies that the price of the trade matches expected market prices.
  - Counterparty Check: Verifies that the counterparty is valid and capable of settling the trade.
  - Regulatory Checks: Ensures the trade complies with all regulatory requirements (e.g., the size of the trade, the security being traded).
- Outcome: If the trade passes validation, it moves to the next step; if there are discrepancies, it may be flagged for correction.
- Example: The price of Apple shares at $180 is checked against real-time market data to confirm it's within an acceptable range.

Description: This is a crucial step in the trade life cycle to ensure that both parties (the buyer and the seller) agree to the terms of the trade.
- Confirmation: One party sends a trade confirmation to the counterparty detailing all aspects of the trade. The counterparty either accepts the terms or raises an issue.
- Affirmation: Affirmation is the act of confirming that the trade details match. It can happen via:
  - Direct communication: Between the two counterparties.
  - Third-party platforms: Like Omgeo or MarkitWire, which automate the process of trade affirmation and reconciliation.
- Risk Reduction: This process helps mitigate the risk of discrepancies and ensures accurate trade details before moving to settlement.
- Example: After execution, both parties exchange trade confirmations, and a third-party system affirms that the details match. Any mismatch is flagged for resolution.

Description: This is the point where the actual transfer of securities and payment occurs between the buyer and the seller. It involves transferring ownership of the securities and delivering the payment (also known as Delivery vs. Payment (DvP)).
- Settlement Cycle: The length of time between the trade execution and the settlement. Common cycles include:
  - T+2 (Trade date plus two business days) for equities.
  - T+1 (Trade date plus one business day) for some bond markets.
- Systems & Participants:
  - Central Counterparty Clearing Houses (CCPs): Clear and settle trades between buyers and sellers to ensure the transaction is completed.
  - Custodians: Banks or financial institutions that handle the settlement process and ensure that securities are delivered to the buyer's account and payment is made to the seller.
- Example: After 2 days, the 1,000 Apple shares are delivered to the buyer's account, and the payment of $180,000 (1,000 shares × $180) is transferred to the seller.

Description: Once a trade is settled, post-trade processes like reconciliation, reporting, risk management, and handling corporate actions occur.
- Reconciliation: Ensures that internal systems match with external records from custodians, exchanges, and clearing houses. This helps detect any discrepancies that need to be resolved.
- Accounting & Reporting: Trade details are reflected in the firm's books. Financial reporting teams ensure that the trade is accounted for correctly in the financial statements.
- Risk & Compliance: Ensures that the trade complies with regulatory requirements and internal risk management practices.
- Corporate Actions: If the security undergoes corporate actions like dividends, stock splits, or mergers, these are handled and processed appropriately.
- Example: After settlement, the trade is reconciled, reported to regulatory bodies, and any dividend payments related to Apple shares are processed.

FIX Protocol: A messaging standard used for electronic trading, which facilitates communication between market participants.
Central Counterparty (CCP): A clearinghouse that takes on the counterparty risk in a trade, ensuring the transaction is completed even if one party defaults.
DvP (Delivery versus Payment): A settlement process that ensures the buyer receives securities only if payment is made.
Reconciliation: The process of ensuring that the internal records of the firm match the external records of custodians, exchanges, and other trade participants.

Trade Life Cycle