The trade life cycle exists almost entirely in the background. This multi-stage process starts from placing your order, and continues all the way until the order is settled. Read on to find out how exactly the trade life cycle works.
This article at a glance:
- The trade life cycle refers to the different stages that a trade goes through, from placement to settlement.
- These processes work in the background to ensure that trades are reviewed, matched, confirmed and settled seamlessly.
Trade Life Cycle: What Does it Mean?
The trade life cycle refers to the many processes that a trade goes through, right from the moment the order is placed to when it is fully settled.
Think of it as all the nuts and bolts required to keep the wheels of the financial markets turning. The markets need liquidity, and they wouldn’t be anywhere near as fluid without the trade life cycle. Every order is reviewed and processed by multiple individuals and organizations, before it is settled.
Different Stages of the Trade Life Cycle
Below we explore the six stages of the trade life cycle, demonstrating what exactly happens the moment you place an order:
- Placing your trade order: Once you pinpoint a trading opportunity in the market, it’s time to place a market order. When submitting an order, your trading software notifies your broker and bank of your request. Your trade order then moves into the second stage of the trade life cycle.
- Checking for risks: A front-office sales trader receives your order and passes it to an internal risk management department within your chosen brokerage. Once this department is happy that the order meets risk parameters and does not put you in undue financial danger, the order is transferred to the exchange.
- Matching the order on the exchange: Next, your order makes its way to the relevant exchange. This is where an order is matched. If you are looking to buy an asset, there must be someone prepared to sell this asset for the price requested. The exchange matches up buyers and sellers to complete the trade.
- Confirming your trade: Once the exchange has paired a suitable buyer with a seller, the post-trade confirmation is passed back to the relevant brokers. Brokers then notify their clients of the trade’s full execution in the market. The broker of both the buyer and the seller must confirm the trade before it enters the clearance stage.
- Reaching the clearinghouse: The role of the clearinghouse or clearing department is to clarify the obligations of each side of the trade. These financial market intermediaries ensure that trades are finalized and settled. Trades are given reference numbers ahead of their settlement date, which typically occurs two days after the date of transaction.
- Settlement date: The settlement date arrives, where funds are formally exchanged between the buyer and the seller. The transfer doesn’t happen between the clients directly, however. The clearinghouse is responsible for handling the assets and moving the funds into the clients’ respective accounts.
Many other smaller details also go into the background of the placement-to-settlement journey of trades. Every time you hit the Buy or Sell order button, these complex processes kick into motion, keeping global financial markets moving.
CFD trade life cycle
The trade life cycle changes when you trade CFDs. Here, you agree to pay the difference between the buy and sell price of underlying assets, instead of outrightly buying or selling assets that you hold. Since you deal with a broker rather than a counterparty, and there is no exchange of underlying assets, the transaction is almost instant.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorized to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.