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Securities Trade Life Cycle

April 26, 2012 admin Mobile[6] Article

The Trade Life Cycle is the referred to, as the workflow of a trade order from its inception stage until the Settlement of the Trade, The Trade Life cycle can be categorized into Front Office, Middle Office and Back Office activities

Front Office: The Front office is usually referred very commonly as the trading floor; it mainly performs two main functions, which 1) Trade Capture and 2) Trade Execution. The front office is where the trade gets initiated. Using the trading app (the front end-user application) is where the order gets booked on the front office as per the market price of the instrument; however, the buyer does an option to quote an offer to the selling counterparty. (There are several ways to place a trade order … like Market Order, Market on close (MOC), Limit Order, Stop Order, etc) If the counterparty agrees to the details of the trade and is willing to enter into the deal, the trade then gets executed.

When the trade is executed, it gets captured in the trading desk (in the Front Office) usually using a Trade capture system. The trade capture system validates all the necessary trade information and assigns a trade confirmation number or a trade reference number; this number will be unique and will be used for all subsequent trade events like the amendment, cancellation etc. .. This reference number is sent back to both the parties (seller and buyer) as an acknowledgement of the “booking” confirmation.

Middle Office: The Middle Office in Trade Life Cycle plays a very vital role in the exception management. This is where the three important steps are done, which are 1) Validation, 2) Booking and 3) Confirmation. Using an Order Management System (OMS), the trader works on the deal, using the OMS the trade gets enriched by static data like the standard settlement instructions (SSI) of the counterparty, Custodian details, City holidays, special instructions etc etc. This static data details are important and critical for the completion and settlement of the trade. The allocation of the trade is done in the middle office (Allocation by Lot Size) and finally the trade gets transmitted into the Back Office, this is when the trade is considered to live and active.

Back Office: The Back Office is technically the “back bone” of the entire life cycle of the trade. The Back Office primarily performs three important functions which are 1) Clearing, 2) Settlement and 3) Accounting. This stage deals with significant operational activities such as record keeping, order confirmations, trade settlement and regulatory reporting.

In most cases, the back office activities are usually outsourced to cheaper sources for its respective management activities (for example .. outsourced to companies like Reuters, Capco, Bloomberg etc.), in order to cut down costs for the company which increases their profitability by delivering greater operational value

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