Euronext.liffe, with its LIFFE CONNECT electronic trading platform, is a fully electronic exchange, as is the International Securities Exchange (ISE) in the US.
The Chicago Board Options Exchange (CBOE) and the American Stock Exchange (Amex) operate from a trading floor, although their 'open outcry' system is augmented by electronic order routing and reporting systems.
Showing posts with label trading system. Show all posts
Showing posts with label trading system. Show all posts
Monday, 26 July 2010
Sunday, 25 July 2010
Settlement Failures in FX markets
Repercussions of Settlement Failure
Although the party that causes the failure typically has to compensate the other counterparty for any interest income lost due to the non-receipt of currency, this failure can have serious repercussions.
Apart from the (cost of) time wasted trying to resolve the issue, such failures can erode a bank’s reputation quite quickly. Also, the party causing the failure will typically have to compensate the other counterparty for any interest income lost due to the non-receipt of currency. A settlement failure may also have a snowball effect in that the receiving bank may have needed the funds to pay another obligation. Additionally, market regulators often apply fines and sanctions to banks that cause settlement failure.
One method to prevent failure in FX market settlement is netting. See in detail here.
Although the party that causes the failure typically has to compensate the other counterparty for any interest income lost due to the non-receipt of currency, this failure can have serious repercussions.
Apart from the (cost of) time wasted trying to resolve the issue, such failures can erode a bank’s reputation quite quickly. Also, the party causing the failure will typically have to compensate the other counterparty for any interest income lost due to the non-receipt of currency. A settlement failure may also have a snowball effect in that the receiving bank may have needed the funds to pay another obligation. Additionally, market regulators often apply fines and sanctions to banks that cause settlement failure.
One method to prevent failure in FX market settlement is netting. See in detail here.
Settlement and payment systems in FX markets
Settlement of FX transactions usually involves the use of secure international and domestic payment system networks. Let us study three of these networks in detail.
Con
Con
Trading systems in FX
The most commonly used trading systems are Reuters and EBS ( Electronic broking system ).
Markets Trading system
spot market Reuters Dealing 3000 Spot matching service , EBS
forward market Reuters Dealing 3000 Forward matching service
Hybrid Tullet-Prebon
Reuters and EBS provide anonymity.
EBS is screen-based working 24X7 throughout weeks.
Markets Trading system
spot market Reuters Dealing 3000 Spot matching service , EBS
forward market Reuters Dealing 3000 Forward matching service
Hybrid Tullet-Prebon
Reuters and EBS provide anonymity.
EBS is screen-based working 24X7 throughout weeks.
Some trading services
SETS (Stock Exchange Electronic Trading Service) is the London Stock Exchange's trading service for UK blue-chip securities. It is an electronic order book that executes hundreds of trades every second.
Trade Enrichment
Trade enrichment is the process of applying relevant information to the trade that is necessary to settle the trade correctly.
It has following elements:
In an automated environment, trade enrichment can be primarily achieved from the static data repository (this is referred to as static data defaulting). If any static data items are missing, the trade is treated as an exception with processing halted until the necessary information is added to the static data repository.
It has following elements:
- Trade figuration, that is, calculating trade cash values
- Trade comparison requirements and validation for counterparties; for example, some trades may not require confirmations to be sent if other trade agreement methods are in place. Trade confirmations to clients carry full details of the trade including fees, commission, and net money. The counterparty's information is not included on the client's confirmation
- The selection of the relevant custodian details
- The transmission of settlement instructions, for example, by SWIFT or fax
- The reporting of trades to stock market regulators
In an automated environment, trade enrichment can be primarily achieved from the static data repository (this is referred to as static data defaulting). If any static data items are missing, the trade is treated as an exception with processing halted until the necessary information is added to the static data repository.
Trade figuration
It is to figure out how much cash is required in the trade.
It can be due to
It can be due to
- Gross trade cash value
Eg. one buys 3000 shares of market value Rs. 10, it will cash him R. 30,000. - CommissionCommission charged by broker/dealer.
- Other factorsOther factors may be stamp duties, purchase and sales tax, securities registration fees, transaction fees imposed by regulatory bodies.
Saturday, 24 July 2010
Settlement status
There are various pre-value date settlement status:
- Matched settlement instructions - If custodian finds everything in order, then status is matched. Then both parties are advised of the status and instructions are kept by custodian till value date.
- Unmatched settlement instructions - If custodian finds any discrepancies, the status is advisory and this is issued to both parties. These are investigated immediately with priority given to those close to value date or having higher net cash value settlement amounts.
- Advisory settlement instructions
- Settled instructions
Settlement Process
Upon receipt (and acknowledgement) of the settlement instruction, the custodian tries to match the instruction with the instruction sent by the counterparty to its custodian. The process of comparing counterparties to a trade can be accomplished in various ways:
Whichever process is used, there are a number of different pre-value date settlement statuses that can arise following such action.
- in the marketplace in which the trade occurs (for example, locked-in trades)
- through custodians
- through clearing firms
- on a trade-by-trade basis
Whichever process is used, there are a number of different pre-value date settlement statuses that can arise following such action.
Settlement instructions
Settlement instructions are normally transmitted from bank's settlement system via some secure method like SWIFT.
System Used
Rather than using transmitting settlement instructions to the custodian from counterparty's system, it can send in an automated way by the authorized third party directly to custodian. This reduces risk of issuing any wrong settlement instruction of trade.
Content of Instruction include
Names - of issuer, issuer's custodian, counter-party, counter-party's custodian
Dates - value/settlement date
Account numbers - of both custodian in deal
Settlement basis - DVP or FOP
Quantity of bonds and net cash settlement value
Information related to securities - security identifier, iso code of currency
System Used
Rather than using transmitting settlement instructions to the custodian from counterparty's system, it can send in an automated way by the authorized third party directly to custodian. This reduces risk of issuing any wrong settlement instruction of trade.
Content of Instruction include
Names - of issuer, issuer's custodian, counter-party, counter-party's custodian
Dates - value/settlement date
Account numbers - of both custodian in deal
Settlement basis - DVP or FOP
Quantity of bonds and net cash settlement value
Information related to securities - security identifier, iso code of currency
Formal recording of trade : Trade capturing
All executed bond trades must be formally recorded. In case of electronic communication , these details are automatically captured.
Details of Trade execution
There can be various things involved in it:
Now the Bonds can be identified by unique in-house number or globally used 12-character alphanumerical code called ISIN number.
In it 1st 2 characters imply country eg. US for US bonds, XS for Eurobond
Next 9 characters represents national securities identification number.
Last character verifies the code.
Security identifier are stored as static data repository.
Flow of trade capturing
1. Trade execution - which is done in the front office.
2. Reconciliation - This is done to check if all the trading details have arrived in the back office from the front office. If some trade details is missing, they are requested again.
3. Validation - Validation of trade is done. If something is invalid is found it is dealt with manually. These are dealt with 'exception'.
4. Settlement - Once all the above steps are done, settlement is fixed and assigned a reference number in the settlement system.
Details of Trade execution
There can be various things involved in it:
- Type of instrument
- Price
- Transaction : buy or sell
- Counterparty details
- Trade date and time and value/settlement date
Now the Bonds can be identified by unique in-house number or globally used 12-character alphanumerical code called ISIN number.
In it 1st 2 characters imply country eg. US for US bonds, XS for Eurobond
Next 9 characters represents national securities identification number.
Last character verifies the code.
Security identifier are stored as static data repository.
Flow of trade capturing
1. Trade execution - which is done in the front office.
2. Reconciliation - This is done to check if all the trading details have arrived in the back office from the front office. If some trade details is missing, they are requested again.
3. Validation - Validation of trade is done. If something is invalid is found it is dealt with manually. These are dealt with 'exception'.
4. Settlement - Once all the above steps are done, settlement is fixed and assigned a reference number in the settlement system.
Flow of order in trading
Here there are 3 persons involved - Investor, Salesperson and the market-maker/trader.
1. Investor places order to salesperson at the bank with details of the order.
2. The order details are recorded by the salesperson.
3. These details are forwarded (automatically if done electronically) to the trader or market-maker.
4. The trader/market-maker places these details in the trade book of that bond market.
Now they can be 2 things that trading is successful or it may fail.
Suppose it is successful, then go to step 5.
5. The trader informs the salesperson of the terms that how the deal is executed. Now execution of order can be partial or full depending on whether it is allowed or not.
6. The salesperson records execution detail. This is similar to step 2.
7. The order execution information is provided to investor.
Similarily if the broker is involved, he may send the details to the bank or the exchange directly. It is similar to the above steps that are shown.
1. Investor places order to salesperson at the bank with details of the order.
2. The order details are recorded by the salesperson.
3. These details are forwarded (automatically if done electronically) to the trader or market-maker.
4. The trader/market-maker places these details in the trade book of that bond market.
Now they can be 2 things that trading is successful or it may fail.
Suppose it is successful, then go to step 5.
5. The trader informs the salesperson of the terms that how the deal is executed. Now execution of order can be partial or full depending on whether it is allowed or not.
6. The salesperson records execution detail. This is similar to step 2.
7. The order execution information is provided to investor.
Similarily if the broker is involved, he may send the details to the bank or the exchange directly. It is similar to the above steps that are shown.
Saturday, 17 July 2010
The Secondary Market of bonds
The secondary market is the market for bonds that have already been issued on the primary market. On the secondary market, investors trade bonds with other investors through financial professionals. The investors who sell the bonds receive the proceeds, minus fees or commission payable to banks/brokers that facilitate the transaction.
Brokers and banks may purchase large numbers of bonds in the primary market and then sell them to investors in the secondary market. A bond may change hands a number of times on the secondary market before it reaches maturity.
The over-the-counter (OTC) market is the most common method of trading bonds on the secondary market. OTC trading refers to the buying and selling of bonds outside of an organized exchange. The market is made up of banks and brokerages that buy and sell bonds over the phone or electronically.
Many bonds are listed on a stock exchange, even though most trading is carried out on the OTC market. Stock exchanges are more transparent than OTC markets because prices and trading volumes are easily observable in exchange-traded markets. Despite this, exchange-traded volumes are still negligible compared to volumes on the OTC market.
The secondary market is the market for bonds that have already been issued on the primary market. The secondary market gives a price to bonds so that they can be sold before maturity.
On the secondary market, investors trade bonds with other investors through financial professionals. The original bond issuers normally play no part in the transaction at this stage. The investors who sell the bonds get the proceeds, minus fees or commission payable to the financial professionals who facilitate the transaction.
People Involved
It involves following people:
Trading Systems
The availability of automated trading systems and securities information systems has greatly enhanced bond trading. It accelerates trading and increases transparency for all market participants. In the US alone, bonds can be traded on over 80 trading systems.
These are the following:
Settlement and Taxation
Settlement
On the secondary market, settlement of trade usually occurs through domestic or international electronic clearing systems, such as Euroclear. Typically, settlement takes three business days (T+3), though it is sometimes shorter.
Taxation
Many countries charge a withholding tax on interest income and capital gains tax on capital gains from bonds.
Where a bilateral tax treaty exists between the issuer's country and the investor's country, the level of tax charged will be limited to the treaty amount. More and more countries are exempting non-residents from such taxes.
Brokers and banks may purchase large numbers of bonds in the primary market and then sell them to investors in the secondary market. A bond may change hands a number of times on the secondary market before it reaches maturity.
The over-the-counter (OTC) market is the most common method of trading bonds on the secondary market. OTC trading refers to the buying and selling of bonds outside of an organized exchange. The market is made up of banks and brokerages that buy and sell bonds over the phone or electronically.
Many bonds are listed on a stock exchange, even though most trading is carried out on the OTC market. Stock exchanges are more transparent than OTC markets because prices and trading volumes are easily observable in exchange-traded markets. Despite this, exchange-traded volumes are still negligible compared to volumes on the OTC market.
The secondary market is the market for bonds that have already been issued on the primary market. The secondary market gives a price to bonds so that they can be sold before maturity.
On the secondary market, investors trade bonds with other investors through financial professionals. The original bond issuers normally play no part in the transaction at this stage. The investors who sell the bonds get the proceeds, minus fees or commission payable to the financial professionals who facilitate the transaction.
People Involved
It involves following people:
- Broker
- Dealers
- Market Makers
- Inter-dealer broker
- Broker-dealer
- OTC - most common way
- ETD
Trading Systems
The availability of automated trading systems and securities information systems has greatly enhanced bond trading. It accelerates trading and increases transparency for all market participants. In the US alone, bonds can be traded on over 80 trading systems.
These are the following:
- Tradeweb
- E-speed
- Eurex bonds
- NYSE bonds
Settlement and Taxation
Settlement
On the secondary market, settlement of trade usually occurs through domestic or international electronic clearing systems, such as Euroclear. Typically, settlement takes three business days (T+3), though it is sometimes shorter.
Taxation
Many countries charge a withholding tax on interest income and capital gains tax on capital gains from bonds.
Where a bilateral tax treaty exists between the issuer's country and the investor's country, the level of tax charged will be limited to the treaty amount. More and more countries are exempting non-residents from such taxes.
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