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Trade Lifecycle

Notes: The Trade Lifecycle - Robert P. Baker

Why People Trade?

  • Require more of less of a product
  • To Make profit
  • To remove risk

Factors Affecting Trade

  • Product Appetite: some want it badly
  • Risk Appetite: some people pay to reduce risk, some make money owning risk
  • Exposure: holding local currency is less attractive when foreign rate is high

Marker Participants

  • Producer
  • Consumer
  • Speculator: takes a view on the likely direction on price change, and takes risks
  • Market Maker: brings buyer & seller together, makes markets efficient

How/Where Trading Takes Place?

  • Brokers: acts on behalf of small entities
  • Exchanges: safe place to trade, eliminates counterparty, legal, liquidity risks
  • Over-the-counter: counter parties trade directly, flexible

When is a trade live?

  • between execution and maturity

Consequences of trading

  • exhange of cash or asset
  • trade itself has value when alive
  • buyer & seller holding different sides of the trade, value of either side may vary over time

Trading in the financial services industry

Two types of trading policy

  • holding a trade to its maturity
  • resale before maturity

Trade Lifecycle

The trade lifecycle encompasses the entire process from the initiation of a trade until its final settlement. Here’s a brief summary:

  1. Pre-Trade: This includes market research, strategy formulation, and order preparation. Traders analyze market conditions, decide on trades, and set parameters for orders.

  2. Execution: Orders are sent to the market through brokers or electronic trading platforms. Execution involves matching buy and sell orders, determining the trade price, and confirming the trade.

  3. Trade Capture: After execution, details of the trade are recorded in trading systems. This step ensures all data like price, quantity, and counterparties are accurately captured.

  4. Confirmation: Both parties confirm the trade details. This might involve manual checks or automated systems to verify terms.

  5. Clearing: The clearing process involves calculating obligations, ensuring that both parties can meet their commitments. This often involves clearing houses which act as intermediaries to guarantee the trade.

  6. Settlement: This is when the actual exchange of securities and payment occurs. Settlement can vary in time from T+1 (trade date plus one day) to T+2 or more, depending on the market and asset class.

  7. Post-Trade: Includes activities like custody, asset servicing, and corporate actions management. It also involves reconciliation to ensure all records match.

  8. Reporting: Trades must be reported for regulatory compliance, transparency, and for internal record-keeping. This can include transaction reporting to regulators.

  9. Risk Management: Throughout the lifecycle, risk is continuously monitored and managed, addressing credit, market, operational, and liquidity risks.

  10. Archiving: Long-term storage of trade data for auditing, compliance, and historical analysis.

Each step involves various stakeholders like traders, brokers, clearing houses, custodians, and regulators, all working to ensure a smooth, accurate, and compliant trade process.