Equity Trade Lifecycle
In this post, I cover the end to end flow of a cash equity trade, the operational layers (Front, middle and back) with associated functions. The flow is described from the perspective of a sell side .
It all starts with an investor deciding to trade a security. The investor approaches a broker that is authorized to trade on the exchange. Once the Broker and investor agree to trade, infrastructure is set-up for broker and investor systems to communicate.
Responsible for receiving client orders and performing preliminary order level checks like daily trading notional, trading limit checks etc.
The order is then validated and enriched by adding the required tags, this is done in the algo engines, smart order router and exchange gateways. Finally, the order is validated for market specific requirements (eg price range checks, tick size rule etc.) and routed to the market for execution.
The fills received from the exchange is relayed back to the client systems (notice of execution), and into the middle office world for booking and confirmation.
Once the order and execution level details are received from front office systems, middle office is responsible for creation of client and market leg of the trade.
Client trade involves validating the order, ensuring the executed block matches with investor expectations (as relayed back in notice of execution), transfer the block of shares to client account, calculate the charges and taxes applicable on the trade, and finally match with the expectations of the client at trade level. The block and trade confirmation matching is done over third party systems like Omgeo CTM .
Market leg of the trade is formed between the trading account and the wash book (varies with mode of trading eg- High Touch, electronic etc.) for settlement with the market.
BackOffice reconciles trades with middle office and front office systems. Ensure trades get settled with the counterparty within the specified cut-off time. Failure to settle a trade could result in buy out option.