Trade validation

Errors can arise when data is placed in electronic format, either from manual keying, scanning, or optical character recognition. For example, with manual input:

• bid and offer prices can be reversed
• incorrect share prices may be entered
• decimal places can be omitted or entered incorrectly

Even if data is correctly entered in electronic form, computer hardware or software can subsequently introduce errors. For example, the bank may pay more (or receive less) than the market value of the securities purchased (or sold). Therefore, in order to facilitate the timely settlement of trades and minimize operational risk, there should be a final check for errors before any trade details are sent externally. The drawback of this activity is the additional processing time, but the downstream impact in terms of both time and cost usually makes it worthwhile.

The checks to be performed on various trades can be classified as fundamental checks, special trades and exception handling. These are cleared here 1 by 1.

• FUNDAMENTAL CHECKS -This includes checking of trade date, value date, quantity and other checks.
  
  
  • Trade date must be a business day and before value date
  • Value date must be a business day and after trade date on T+3 or T+1 depending on equities or bonds or depending on different countries.
  • Quantity - must be whole numbers
  • Others - Securities must be identifiable, and in case of rights or warrants they must be 'alive'.
• SPECIAL TRADES
  Further trade validation may need to be performed on some trades, for instance:
  
  
  
  • trades that are deemed to be large, that is, the settlement value is above a specified minimum threshold
  • trades in a specific security/market, for example, a new market or a stock that trades infrequently
  • trades with a specific counterparty, for example, a new broker or bank
  • trades with a value date in the past (note however that 'as of' trades, that is, trades processed after their actual trade date, are valid trades)
  • trades with prices outside a specified range, for example, 5% above or below the current market price for the stock; this can, for instance, identify trades that traders have mistakenly entered at off-market prices or where the trader has dealt in the wrong stock
  • trades settling on a free of payment (FOP) basis
    
  Different institutions are likely to have further criteria in place for the process of trade validation. Any trade not meeting one of these criteria may again be classed as an exception and be made subject to exception processing.
  
  Much of the trade validation process can be handled on an automated basis by rules-based error checking and exception reporting, that is, setting up specific rules within the settlement system to mark any trades that fail validation tests as exceptions.
  
• EXCEPTION HANDLING
  Trades that are subject to exception handling are routed to the appropriate person/department for investigation. If the issue is resolved, the data is updated and the trade is released again for settlement. Some trades might need to be amended or canceled, in which case they may need to be returned to the front office. Other trades may not be resolved within an acceptable period of time, in which case they may be escalated to a more experienced or knowledgeable member of the middle office or operations area.