Equity Trade Flow
Equity Trade Life Cycle
An equity also known as share, stock or preferential share is defined as an equal portion in a company’s capital that is sold and traded in the capital markets.
In India, BSE (Bombay Stock Exchange) and NSE (National Stock exchange) are two main capital markets where these equities are freshly issued and traded. The performance of any national market is measured by using their corresponding Index.
An index is defined as a barometer of a market. An index measures the performance of top Tier I & Tier II stocks that are qualified and listed in the respective stock exchange. BSE’s performance is measure using the index SENSEX (Sensitive Index) and NSE’s performance is measured using the index NIFTY (National Fifty).
Sensex is a measure of 30 top stocks across each and every sector. Similarly NIFTY is a measure of top 50 that includes various sectorial stocks in NSE.
Stock trade flow:
SWIFT (Society for Worldwide Information for Financial Telecommunication) is an authenticated messaging service between banks and other financial institutions. All settlement instructions are taken care by using these SWIFT messages. These SWIFT messages come under the ISO 15022 standards which govern the format in which SWIFT messages should be sent and received across to different financial institutions. All category 5 messages take care of the below transactions:
1. TIC – Trade Initiation and confirmation
2. S&R – Settlement and Reconciliation
3. CA – Corporate actions
The entities that participate in trade includes the following:
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Client who can either be an Investment manager, Assert Manager or an Assert (or Investment) Management Company (AMC).
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Then Custodian who can either be a broker or a dealer who would be in-charge of executing the order.
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The DP (Depository Participant) who would be responsible for trade settlement.
Traditional Trade Flow
The life cycle of a trade starts with the Client placing an order for the purchase of securities along with the price and other parameters with which the trade should be executed. This business process is known as Trade capture. The Dealer (or broker) also sends in his trade details that contains specifics such as stock details, price of trade, quantity, commission and settlement details.
The client’s trade information and dealer’s trade information is processed and matched. This is business process is known as Trade Matching. Both Trade capture and trade matching happens on the same day (T+0 – Trade Day). All such trades that are captured and matched are said to be successfully matched trades. Once the trade is matched, the dealer and the clients are informed through SWIFT messages that trade was successful.
Then Clearing happens the next (T+1) day. Clearing is defined as a set of business processes that happens between when the order is placed till the actual clearing process happens. The cash gets settled first followed by the securities that gets deposited in the customer’s DEMAT account.
Settlement is a process by which the securities get deposited to the dematerialized (DEMAT) account of the end customer. Settlement happens on T+2th day. Recording or reconciliation process is that process that involves matching of the details that are obtained from a successful trade execution. Reconciliation happens on T+3 days. This is when the trade is considered to be complete. An audit trail based system best explains the entire trade flow process.
CA – Corporate action is defined as set of transations (either financial or non-financial) that are communicated either to the customer or the custodian through SWIFT messages. The most common corporate actions includes the below:
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Informing the customer about the declaration of divident
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Communication of an event
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Claim processing
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Instruction processing
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Reporting
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Reconciling
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Requesting for votes from the customer
- General stock performance
For further and indepth information please mail me at arun.vijayaraghavan@focustesting.com
Thanks,
Arun
Arun Vijayaraghavan is a Senior QA working for one of the world's largest Investment Banks. Arun has extensive experience in Retail Banking, Investment banking and non-life insurance domains.
