Three major steps involved in investment banking trading are as follows:
1. Order Execution
An Order is a direction given to dealer to execute a trade with the client at a certain price specified in the placed trading order. Dealers do a continuous market scanning to check for certain price to execute the trading order. Different types of trading orders are:
Different Types of orders
Market Order: A market order directs the dealer to execute a transaction at the current market price whatever the price may be. This execution happens instantly.
Limit Orders: A limit order directs the dealer to execute a transaction only at a specified price or at a better price. A limit order is best used when the actual price at which the trade is done is more important than the time at which it is done. Since a limit order is always entered away from the current market price, it takes time to be executed. Sometimes the order is not executed at all during the market trading hours.
Stop Order: A Stop Order will be executed if the price level is breached. Traders often use stop orders to protect profitable positions against unexpected market reversals.
Stop Limit Order: A slightly more complex order strategy is the stop limit order, in which a limit order is activated when market prices move through a stop level. In simple words, if the limit price cannot be traded after the stop is penetrated; the order will not be filled. The stop limit order is most useful in markets where the price movements are unpredictable.
Day Order: Day orders are valid for a particular day only. It expires once the trading for that particular day is over.
Strategies of Execution
Different types of order execution strategies used are as follows:
Best Execution: Best execution is a broker/dealer’s obligation to seek the best terms reasonably available when executing a transaction on behalf of a client. While there is no one standard of what determines best execution, speed of transaction, execution price, price improvement opportunities and liquidity are some of the deciding factors.
National Best Bid and Offer: It is the consolidated quotation for a single security that is representative of the highest bid price available and the lowest offer price available among participating quoting market centers.
Speed of execution: There are five basic points to an execution: broker receives order from client, broker routes order to market center, market center acknowledges order receipt, order is executed by market center and order confirmation is displayed to client. The time elapsed between when we route an order to a market center and when that order is executed by the market center is a common measure of execution speed. One more measurement is the total time from when we receive an order from a client to when an order confirmation is displayed to a client.
2. Trade Matching
In a trade, there are two types of fields which are primary fields and secondary fields. Trade matching is done based on following Criteria:
Exact Match – When all primary and secondary fields match.
Primary Match Bucket– When only all the primary fields match but the secondary fields do not match.
Suggested Match Bucket – When one primary field does not match.
Unmatched Bucket – When more than one primary field does not match.
When a trade is not found in the exchange for a contra party trade, the contra party trade is sent as an advisory and exception is raised and sent to Trade Exception Manager.
The trades coming from Front end flows to the Back office via Trade Flow Manager. It does necessary validations and enrichments and parses the message and sends it to backend to complete the trade execution process.
3. Clearance and Settlement
Here at this stage clearing and settlement of the amount is taken place based on the trading activities among the clearing members, investment banks/traders and customers.