Trade Life Cycle

TRADE LIFE CYCLE OTC VS EXCHANGE TRADED 

INTRODUCTION:

 In the world of finance, trade execution is a meticulously choreographed dance that follows a well-defined path, known as the trade life cycle. Whether you’re a seasoned trader or a novice investor, understanding this journey is vital. 

OTC TRADE LIFE CYCLE

Marketplace:

The most fundamental differenc3e lies in the marketplace. OTC trades occur directly between parties, typically facilitated by brokers or dealers, while exchange-traded trades transpire on organized and regulated exchanges.

Order Matching:

In OTC markets, order matching often relies on bilateral negotiation and may lack the transparency and efficiency of exchange-traded markets, which use automated order matching systems.

Standardization:

Exchange traded products, such as stocks and futures contracts, are often highly standardized, with clear terms and contract specifications. OTC products can be highly customized, making the trade life cycle more complex due to negotiation of specific terms.

Counterparty Risk:

OTC trades carry higher counterparty risk because they rely on the financial stability of the involved parties. In contrast, exchange-traded trades benefit from central clearinghouses that mitigate counterparty risk.

Regulation:

Exchange traded markets are subject to stringent regulatory oversight, ensuring transparency, fairness, and investor protection. OTC markets may have varying degrees of regulation depending on the jurisdiction and product.

Trade Confirmation:

Exchange traded trades typically have standardized confirmations, whereas OTC trades may involve more negotiation and customization, leading to potentially more complex confirmation processes.

Settlement:

Exchange traded securities often settle through centralized clearinghouses, providing efficiency and reducing settlement risk. OTC settlements may vary, ranging from manual processes to using specialized clearinghouses.

 Stages In Exchange Trade Life Cycle

Trade Initiation

Trade Execution

Trade Enrichment

Trade Validation

Trade Verification

Trade Confirmation

Trade Settlement

Trade Reconciliation

Trade Reporting

Trade Initiation:

The Client Decides to buy or sell a specific Security & Contact one of the STO’s with whom it 

normally trade

Trade Execution:

Orders are placed on the exchange and gets a confirmation from the exchange that orders has been Executed

 

Trade Capture:

Once the Order has been executed the order is fed down to the RMS/OMS. Details like Direction, Qty, Name of the Instruments, Prices, Counter Party, Trade date are Fed in RMS/OMS.

Trade Enrichment:

Adding Economic and Non Economic details to the trade.

Economic details are: Commission Charged, Taxes, Etc. In economic details

Non-Economic details are: Bank accounts, Custodian Details Etc..

Trade Validation:

Have to Check Trade, Trader and CP Check 

Trade Check: Check the order in the standard specification of the exchange like Qty, (Standard ) Price, Lot Size Etc.

Trader Check: Does the Trader has certification to trade in these type of Securities, Limits available to the trade.

Counter party Check: To Check various aspects of the counter party like any news (Negative) of the CP & weather counter party is eligible to trade in these securities.

 

Trade Verification:

Here trade is compared with the trade sheet (Email/Excel file sent from Front Office to middle office) Just to make sure that details are entered & booked are correct.

Trade Confirmation:

Send the Economic & Non Economic details sent to the Client. It can be sent through PDF File/ Excel File or by using Electronic platforms Such as OMGEO 

& MARKT to confirm the traders.

Trade Settlement:

Exchange of Securities VS Cash this is where clearing house comes into picture & make all necessary calculations for the buy side & sell side of the trade in order to determine what needed from each of them & by when.

Example: T (Trade Date) +2 days were cash securities are exchanged.

Trade Reconciliation:

Reconciliation Involves matching ledgers against statements to ensure correct accounting of

all the trades booked.

“It is a Control Process where in 2 or more independent sets of the data elements are compared   

and Matched”

Trade Reporting:

Trade Reporting is also one of the most important steps in Exchange Trade Life Cycle were

we report all the trades to the regulators. We need to report to the appropriate regulators 

of each transactions undertaken within a Pre-Started time frame from the time of trade 

 execution. This is commonly referred to as supervision or surveillance with in the regulator. 

                 THANK YOU.