Investing Education: What is Post-Trade?
As the landscape of the global capital market is rapidly transforming, the industry for various services is coming of age. In response to this, business firms are identifying and making certain strategies in order to adapt to such changes as well as to move toward re-configuring their operations.
Simple, as it may seem, the concept of trading of finance is rather complex. Also, when it comes to trades, the main goal is to achieve the highest price while having the least risk as possible. In order to achieve this, careful planning and actions should be done. Below you can find an overview about one of the essential steps during the trade life cycle: post-trade.
The Trade Lifecycle
Before we talk about what happens in post trade, let’s know first what a trade cycle is. Trade cycle refers to the series of events that are involved during the exchange of financial products and stocks.
Basically, the trade life cycle is often divided into two parts: pre-trade and post-trade. As its name suggests, pre-trade occurs before the actual trade itself and even before the orders are made.
On the other hand, post-trade is performed after the completion of a trade. Here, the seller and buyer evaluate trade details and transactions and perform changes in the records of ownership. Additionally, arrangements regarding transfer of securities and cash are also done.
Activities During Post-trade
Post-trade is not as simple as it may sound. Aside from the aforementioned activities, post trade is generally divided into three main parts: order matching and conversion, confirmation, and entire clearing and settlement. These individual steps are briefly described below.
Order matching and conversion
Under this step, orders are organized and are delivered to be executed in the exchange. Once done, the details of the trade (i.e. taxes and commission charges) are sent as notifications and are later executed.
After the successful execution, trade confirmations are sent to the funding manager. At the same time, cross verifications regarding allocation matches and other trade details (i.e. number of orders and their prices) are being done.
Entire clearing and settlement
Last but not the least is the process of clearing and settlement where accounts are opened again with certain banks. During this step, the members of the trade are reminded of their obligations in bank accounts.
Commoditization of Post-trade Processing
Unfortunately, post trade processing is slowly becoming a huge commoditized service, but not because on the quality of service given but because of mere increase in demand. Another factor is that banks that offer post-trade processing are often troubled by a dilemma: gaining very little despite working their very best or working poorly and losing a lot in return.
Because of this, banks are put under great pressure of reducing service costs, leading to further fluctuations in trading volumes. In the end, this makes post-trade processing a commodity that only few people can afford.