Investors tend to plan out good investment opportunities for themselves in equities. These investors can be retail investors, organizations, institutions, or organizations working for a client. Trillions of trades take place every day. From order to settlement, every component of a trade fits so well and takes place seamlessly. Suppose you ever wondered what’s the reason for this smooth procedure and the role of investors and company. It happens due to the continuous orderly working of the entire process called the Equity Trade Life Cycle.
What is the equity trade life cycle?
The Equity Trade Life Cycle is the entire trade order process, including selling, buying, and carrying out the exchange of any security in the market. The equity trade life cycle begins with investors’ interest in trading the equity. To do so, the investor approaches an authorized broker who forms an agreement to trade the security. Once the agreement is in place, the trade life cycle moves forward to execute the entire trade by the broker and investor systems that communicate in sync.
Covering the flow of activities from the sell-side, end to end flow of the equity trade life cycle includes the front office, middle office, and back office activities. Let’s peer further into each of these activities to understand the entire process in detail from the sell-side.
Front office activities
The front office usually referred to as the trading floor, is where the trade gets initiated. This is where the pre-trade checks are performed.
The front office receives the client orders and performs preliminary checks on these orders in the form of trading limit checks, daily trading notional, etc. Using algorithm engines, exchange gateways, and smart order routes, the order is confirmed and validated for all the checks specific to the market, such as tick size rule, price range, etc. This is a pivotal step that decides where trade will go further to be executed. The validation checks ensure correct trade recording from the very first step. Post that, the trade is routed for execution.
The details received from the trade exchange are communicated to the client’s system with a positive or negative acknowledgment, and a notice stating the execution would take place. Similarly, the same is sent forward to the middle office to carry out the further process of booking and confirmation.
Middle office activities
Post receiving the details for order and execution, the middle office has its essential activities that play an essential role in making a trade active. They create the client and handle the market leg of the trade. They also play an important role in exception management.
The middle office activities start with validating the client’s order to ensure that the executed number matches thoroughly with the numbers presented in the notice of execution that is sent to the client systems. It also involves building a match of the client expectations of the trade level. To ensure this, validating the order also affects the proper transfer of the block of shares to the client’s account, calculating the taxes applicable on a particular trade and reconciling the numbers to ensure its accuracy. Third-party systems are used to do trade and block confirmation.
Depending on the mode of trading such as high touch, electronic, etc, a single position in trading ie. A market leg is formed between the wash book and the trading account.
Back office activities
The back office plays a vital role in settlement and accounting. This stage maintains records, settles the trade, ensures final regulatory checks and other operational activities.
Back office activities manage to reconcile the activities of the front office and middle office activities as well. The back office activities also tend to be outsourced to companies to save costs, which end up increasing the company’s revenue and providing better output in terms of value generation on an operational level.
If there is a failure to settle any trade, the buyout option is also an availability. The back office is responsible for the trades getting carried out within the specified period. The back office maintains the documentation of these trades and accurate reporting. The sell-side gives security to the buy-side. This transfer is facilitated via a clearing house or third party.
The final report of the entire trade is given to both parties in the process, ie. The investors or clients and the exchange.
It is important to understand the equity trade lifecycle for anyone involved as a party in any of these trades. The extensive knowledge of the equity trade lifecycle process ensures that the clients or investors understand their trade orders’ rationale and in-depth processing. This enables a smooth functioning between the buy-side and the sell-side. Since trillions of trades take place per day, being aware of the equity trade life cycle gives a client a more transparent view and firm timeline behind the daily activities of their important trades.