Overview
When a trader wishes to make a trade she needs to find a counterparty who wishes to take the other side of the trade. This involves either going to a broker/dealer who can fill the trade, or to try to find a counter party on an exchange.
Once the decision has been made to make a trade, it has to go through a series of steps in order to actually execute the trade.
Retail Trading and Securities Trading Organizations
Retail traders need to trade through a Securities Trading Organization. These firms have the necessary infrastructure to execute trades, and they offer those services to their clients. Security Trading Organizations include
Securities Trading Organitions typically use custodians to exchange cash and securities on their behalf, and to hold the securities owned by the Securities Trading Organization. Sometimes, Securities Trading Organizations trade through a centralized clearing party.
Steps
The following represent a generic list of steps taken during the trade process.
- Trade Execution - the initial agreement between two parties to a trade.
- Trade Capture - the process of capturing and recording the information necessary to identify and process a trade
- Clearing
- the processes that occur after trade execution and up to final settlement. This can include
- Margining and Cashflow Payments
- Matching Trades and Reconciling
- Settlement
Straight Through Processing refers to the full automation of the trade steps, from trade capture through settlement.
Tracking Share Ownership
Certificates of stock in a company, while originally printed on a physical medium such as paper, are now just records in a computer. When someone buys a share, the company that issued the share needs to make a record of the ownership. This can create a tracking nightmare for the issuing company.
One of the ways that this complex tracking issue is mitigated is through the use of intermediaries who hold the shares through the mechanism of beneficial ownership. That is, a large firm such as a brokerage firm buys the shares, and the issuing company records the brokerage firm as owning the shares, however, the shares are purchased for their clients, and the client ownership is maintained in the books of the brokerage firm. This is referred to as "street name".