Chapter 2 - Automating Trade and Order Flow

Abstract

This chapter describes the automated trade and order flow carried out by brokerage firms. When a trade is traditionally executed in an exchange or in an over the counter (OTC) market, a number of stages have to be followed to achieve an effective transfer of securities versus payment between counterparties. Once a transaction has been executed by the front office, the trade-processing responsibility rests with various back-office personnel. The back office is responsible for processing all payments and delivery or receipt of securities, commodities, and written contracts. They are responsible for verifying the amounts and direction of payments that are made under a range of netting agreements. When a transaction is agreed upon, a confirmation is sent to the counterparty. The back office should then initiate, follow up, and control counterparty confirmations. A strictly controlled confirmation process helps to prevent fraudulent trades. After a purchase or sale has been made, the transaction must be cleared through back-office interaction with a clearing agent. On the settlement date, payments or instruments are exchanged and general ledger entries are updated. Settlement is completed when the buyer or buyer's agent has received or delivered securities and the seller has been paid. The back office should perform timely reconciliation with the policies and procedures of the institution. Reconciliation should determine positions held by the front office as well as provide an audit trail for regulatory reporting. The typical reports that need to be reconciled include trader positions, regulatory reports, broker statements, and income statements.