The document discusses the trade life cycle in financial markets. It describes the key functions of the front office, middle office, and back office in processing a trade from order receipt through settlement. The front office is responsible for trade execution and capture. The middle office validates, enriches, books and confirms trades. The back office handles clearing, settlement, accounting and reporting. Together these functions ensure trades are properly processed and records are accurate.

1. TRADE LIFE CYCLE
By :Ankit Capoor

2. CAPITAL MARKETS

3. WE WILL LEARN
 Introduction to Trade Life Cycle
 Front Office Functions
 Middle Office Functions
 Back Office Functions

4. WHY DO WE TRADE ?
We want our money to work for us.
Speculate (Short Term)
Accumulate (Long Term)
Wealth Creation (Long Term)

5. COMPARISON OF ASSET CLASSES

6. WHY INVESTMENT BANK?
• Investment bankers are typically the highest-paid workers in
the finance industry—high salaries are most prevalent even
among younger employees.
• Ocean of opportunities – Have various functions from
backoffice roles to front office roles.
• Over 5,000 Investment banking related jobs to be created in
India by 2025.
• Hyderabad and Bangalore are hotspot for major investment
banks, recently J P Morgan Chase and Goldman Sachs have
started their new offices.

7. AVERAGE SALARY

9. INTRODUCTION
 In the financial market, “trade” means to buy and/or
sell securities/financial products.
 To explain it further, a trade is the conversion of an
order placed on the exchange which results in pay-
in and pay-out of funds and securities. The trade
ends with the settlement of the order placed.
 All the steps involved in a trade, from the point of
order receipt (where relevant) and trade execution
through to settlement of the trade, are commonly
referred to as the ‘trade lifecycle’.

10. COMMON TERMS IN TRADE LIFE CYCLE
 ISIN : International Securities Identification Number
 SEDOL: Security Exchange Daily Official List
 SSI : Standard Settlement Instruction
 SWIFT : Society for Worldwide International
Financial Telecommunication.
 IBAN : International Bank Account Number
 LIBOR : London Inter Bank Offered Rate.

11. INVESTMENT BANKING FUNCTIONS

12. FRONT OFFICE
Buyer
FRONT OFFICE
Trade Execution
Trade Capture

13. FRONT OFFICE
Trade Execution
 Order execution is the process of accepting and
completing a buy or sell order in the market on
behalf of a client.
 Order execution may be carried out manually or
electronically, subject to the limits or conditions
placed on the order by the account holder.
 Brokers are beholden to best execution practices
that are regulated by the exchanges

14. FRONT OFFICE
Trade Capture
 Orders are received from clients
 These are received by sales traders via phone
these are termed as cash orders.
 Orders received electronically are termed are DMA
or ALGO orders
 New orders are entered into Order Management
System.
 This step is referred as “ Trade Capture”.

15. FRONT OFFICE
 Order price are as follows:
Limit
• A price is specified, meaning
– When buying, pay no more than the stated price
– When selling, accept no less than the stated price
At Best • At the best available price, also known as an At
Market Order
Stop Loss • Sell if and when the market price falls to the
stated price

16. MIDDLE OFFICE
The Middle Office in Trade Life Cycle plays a vital
role in the exception management. This is where the
three important steps are done, which are:
Validation Enrichment Booking Confirmation

17. MIDDLE OFFICE
Trade Validation : Fundamental checks on the trade
which includes
 Trading book
 Security identifier
 Trade date
 Quantity
 Price
 Commission
 SSI
 Value date

18. MIDDLE OFFICE
Trade Enrichment: Trade Enrichment refers to an enhancement of
something valuable to improve efficiency. It adds specific trade data to
the basic trade detail to allow Downstream Processing. It involves
selection, calculation, and attachment to trade of appropriate
information which is essential to complete various required actions
following
Trade components that require enhancements are related to:
• Trade figuration – calculating trade cash values
• Trade comparison requirements and validation for counterparties
• Selection of relevant custodian details
• Issuing Settlement instructions (For example, by SWIFT or fax)
• Reporting the trade to the regulatory authorities trade Enrichment
can be effectively achieved from the static data repository, in an
automated environment. Supposing any data items are absent, the
trade is treated as an exception and all the processing will be
aborted until the required information is added to the static data
repository.

19. MIDDLE OFFICE
 Methods of trade validation
The validation of trades can be done manually or
electronically
Manual – As there are numerous trade components
to be validated only limited components can be
manually validated. There is also possibility of human
error and hence it is used for scanning the trades.
Automatic- Most of trades are automatically validated
via systems any potential difference between buyer
and seller are highlighted and can be corrected
before settlement.

20. MIDDLE OFFICE
 Trade Booking: Booking of trades from front office
into internal systems and comparing the details in
order to avoid settlement delays. Orders are
received via email or electronically via FIX (financial
information exchange) message.
 FIX has become the language of the global
financial markets used extensively by buy and sell-
side firms, trading platforms and even regulators to
communicate trade information. This non-
proprietary, free and open standard is constantly
being developed to support evolving business and
regulatory needs, and is used by thousands of firms
every day to complete millions of transactions

21. MIDDLE OFFICE
 Trade Confirmation: The trade that is now
actualized still needs to be confirmed. Brokers on
both sides of the trade (the buyers and the sellers)
will make sure their clients agree with the specifics
of the trade. These details include which securities
are being exchanged, at what price, and at which
date the settlement will occur. It can be done in
various ways depending on client requirement
electronically or via pdf or excel.

22. BACK OFFICE
Clearing
Trade Settlement
Accounting and
Reporting

23. BACK OFFICE
Clearing : Once the trade is in the clearing house, it’s time
to calculate exactly what is needed from each side of the
trade. The clearing house then informs both sides of what
is needed. It also ensures that all of the obligations are
met by both sides.
The most common way to trade is T+2, in which T stands
for the transaction date and 2 represents the number of
days after the transaction date in which the settlement will
take place. In the case of T+2, it means the settlement will
take place 2 days after the transaction is made. After this a
trade will flow into the final stage in this journey, the
settlement phase.

24. BACK OFFICE
Trade Settlement: In the securities industry, the
trade settlement period refers to the time between
the trade date—month, day, and year that an order is
executed in the market—and the settlement date—
when a trade is considered final. On the last day of
the settlement period, the buyer becomes the holder
of record of the security.

25. BACK OFFICE
The classification of Trade settlement can be done into 3 types:
• Normal/ Rolling Settlement
• Trade-to-Trade Settlement
• Auction
 Rolling Settlement
In this type of trade settlement, securities are settled on
successive dates based on the settlement period in the contract
and the day when the trade was executed. So, let’s take a trade
contract period with T + 2 days settlement time, here if a trade is
placed on Monday and another trade is placed on Tuesday, the
trade on Monday will be settled on Wednesday and the trade
executed on Tuesday will be settled on Thursday (successively).
This is different from the account settlement method wherein the
trade executed within a given period is all settled at once.

26. BACK OFFICE
Settlement Failure –
There are three key reasons why trades fail: (1) issues with
funding and inventory of investment assets; (2) inefficient
manual processes; and (3) failures of automated systems to
produce accurate data and integrate with the reconciliation
process.
 With funding and inventory issues, the buyer:
• May not have enough cash in the account designated for
settling trades with the custodian
• May not have credit line in place or an overdraft agreement
with the custodian in the event of a cash or credit deficiency in
the account being traded
• Does not have a netting agreement in place with the
counterparty

27. BACK OFFICE
 Trade-to-Trade Settlement
In the Asset allocation, Trade to Trade Settlement method, intraday trading in
prohibited for securities falling in this segment.
In this type of settlement method, the trader is required to accept the delivery of
the security when bought and provide the monetary value, while selling the
trader has to deliver the securities and the monetary value of the same will be
provided to the trader for the securities traded. In short, shares are traded only
for delivery.
 Auction
Any trade involves at least two parties to the transaction, in the trading of
financial securities, on one side we have the buyer of the security on the other
side we have the seller of the financial security. The auction takes place when
the selling party of the transaction or trade fails to deliver within the given period
on the agreement of selling the security for the said or agreed upon monetary
value of the security. It’s a kind of penalty for the investor’s carelessness while
trading.
In this case of failure, the broker of the selling party will try to purchase the
security in a buy-in-auction market, the sum of the auction price along with the
penalty and brokerage charges has to be paid by the defaulter (the selling party).
The settlement of the action is done on T+3 days given the broker tries and
purchases the share in the auction market on T + 2 days.

28. BACK OFFICE
When a trade fails, the effects can range from operational costs
and risks, as well as damage to reputation and relationships with
counterparties.
The party who fails to pay or deliver the security may be asked
for compensation for the opportunity costs on the value of the
deal until settlement is reached or the party who failed to pay or
deliver the security may be asked to pay fines for failing to meet
their trading obligations

29. BACK OFFICE
Accounting and Reporting: The reconciliation
stage of the trade life cycle ensures that all accounts
of the trade which has taken place are consistent
and accurate. Reconciliation can be performed in
several ways, but it involves the act of comparing
ledgers against statements from both sides of the
trade. This confirms records made and avoids the
possibility of fraud or inaccurate record keeping.

30. OTHER IMPORTANT DIVISIONS OF TRADE LIFE
CYCLE
Investment
Bank
Research
Legal and
Compliance
Risk and
Fraud
Management
Controls

31. DID YOU KNOW
 It is estimated global stock market value stands at
$95 trillion.
 1653 first stock exchange was established in
Amsterdam.
 1875 BSE was established
 Most expensive Indian stock INR 85,166
 Most expensive stock Berkshire Hathaway –
$ 4,18,402.00