Equity Trade Life Cycle

Equity Trade Life Cycle

The Equity Trade Life Cycle is a well-planned choreography that involves corporations, investors, and several processes to guarantee seamless and organized transactions. Consider this cycle as a sequence of well-planned actions that begin when an investor chooses to purchase or sell stocks and end when the deal is settled. There are several steps in this procedure, including placing an order, finding buyers and sellers, and completing the transaction. Trillions of deals take place daily on the stock market, which operates successfully and efficiently because of the smooth operation of this cycle. 

Let's explore the fascinating Trade Life Cycle of equity and discover the roles that each stage plays in this complex system.

What is the Equity Trade Life Cycle?

The equities transaction life cycle refers to the entire trading order process, which includes buying, selling, and exchanging any market stock. The equity transaction life cycle begins with investor interest in trading stocks.

The trader meets a licensed stockbroker, who then draughts a trading transaction for the stock to achieve this. After a deal is completed, the trade life cycle moves forward such that the broker and trader systems may finish a total trade since they are in sync.

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Table of Content

  1. What is the Equity Trade Life Cycle?
  2. What is an Equity Trade System?
  3. Equity Trade Life Cycle: Its Various Phases
  4. Front Office Activities
  5. Middle Office Activities
  6. Back Office Activities

What is an Equity Trade System?

Businesses trade their stocks and shares on the equity market. In an equity market, stocks are traded over the counter or via stock exchanges.

The share or stock market, sometimes called an equity market, allows buyers and sellers to deal in stocks or equity inside the same forum.

Above all, it is vital to possess a comprehensive understanding of the Indian equities market. 

Through the same platform, the market allows buyers and sellers to deal in shares or stocks. To understand the process from the sell-side viewpoint, let us closely examine each of these steps.

Equity Trade Life Cycle: Its Various Phases

Here, we look at the six stages of the stock trading life cycle and demonstrate the precise actions involved in a purchase:

Phase 1: Putting a Trade Order

Issue a market order when you see a trade opportunity on the stock exchange. Your trading platform notifies your financial institution and brokerage about the buy request whenever you order. The equity trade life cycle starts its second phase when your trade buy order is received.

Phase 2: Analyzing Risks

A front-office sales dealer takes your order and forwards it to the brokerage of your choice's internal risk control department. Once this division approves that orders meet risk standards and won't compromise your funds, they are sent to the exchange.

Phase 3: Matching Order

After that, your order is sent to the relevant exchange for matching. An order-to-order match is made here. The asset you wish to acquire needs a buyer, and that buyer needs to be prepared to pay the asking price. The market links buyers and sellers so that the deal may be completed.

Phase 4: Confirming Your Transaction

The post-trade confirmation is returned to the relevant middlemen when the market finds a qualified buyer and a seller. Once a deal has been entirely performed in the market, brokers notify their clients. The seller and, buyer, brokers must verify the deal before proceeding to the clearing stage.

Phase 5: Getting to the Clearinghouse

The clearinghouse's or clearance agency's responsibility is to specify each party's obligations under the agreement. These intermediaries at the market level guarantee that transactions are concluded and settled. Reference numbers are issued to deals before settlement, which typically occurs two days following the date of acquisition.

Phase 6: Settlement Date

On the closing day, funds are formally transferred from the buyer to the seller. However, the clients do not exchange money directly with one another. The clearinghouse oversees the allocation of resources and deposits funds into the relevant client accounts.

The background of the trade's journey from allocation to settlement also consists of many other smaller details. When you click the Sell or Buy checkout button, these complex processes begin, maintaining the global stock system.

Front office, middle office, and back office operations are included in the end-to-end flow of the stock trading life cycle, covering the flow of activities from the sell side. To have a detailed understanding of the complete process from the sell side, let's take a closer look at each of these operations.

Front Office Activities

The trading floor handles pre-trade inspections and deal initiation, sometimes called the front office. Client orders are received, and initial checks, like daily trading nations and trading limit checks, are completed. Exchange gateways, smart order routes, and algorithm engines are used to validate and confirm the order. The execution location of the deal is decided in this phase. Validation checks guarantee accurate transaction recording right from the start. The deal is set to be carried out. The trade exchange sends the data to the client's system, which then notifies it of the execution and a positive or negative acknowledgement. The middle office then manages booking and confirmation.

Middle Office Activities

By establishing the customer and managing the market portion of the trade, the middle office is essential to a trade activity. They construct a match between the transaction level and the client's expectations and make sure the executed figures match the notice of execution. The correct transfer of shares to the client's account, tax calculations, and accuracy reconciliation are all impacted by validating the order. Systems from other parties are employed for block confirmation and trading. Depending on the trading style, a single trading position might establish a market leg between the trading account and the wash book.

Back Office Activities

Maintaining records, settling deals, accounting, and regulatory checks depend on the back office. It balances operations in the front and middle offices and may be outsourced to save expenses while boosting revenue and creating value. The back office may make a buyout option available if a deal isn't resolved. The back office keeps track of paperwork, ensures that deals are completed within deadlines, and produces accurate reporting. With the help of a clearing house or other third party, the sell-side gives the buy-side protection. Investors, customers, and the exchange receive a final report on the deal.

Any participating in these deals should be aware of the equity trading lifecycle. A thorough understanding of the equities transaction lifecycle procedure guarantees that investors or clients comprehend the reasoning behind and comprehensive processing of their trade orders. This makes it possible for the buy side and the sell-side to operate together seamlessly. Understanding the stock trade life cycle gives a customer a clearer picture and a more transparent timetable of the daily operations of their significant deals, since billions of trades occur every day.

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FAQs on Equity Trade Life Cycle

Private equity instruments are often provided to investment companies in preferred stock form rather than being offered on secondary equity markets. Leveraged buyouts, venture capital, and private investments in public equities are the three categories of private equity investments.

The front office handles pre-trade activities, receives client orders, performs initial checks, decides on execution locations, and validates transactions before sending them for execution.

The middle office establishes a match between transactions and client expectations, ensures execution accuracy, manages share transfers, performs reconciliations, and handles trading position establishment.

The back office manages records, settlement, accounting, regulatory compliance, and reporting. It balances front and middle office operations, ensuring deals are completed accurately and within deadlines.