Order Handling, Trade Processing and Settlement
From instruction to settlement
The lifecycle is: receipt and time-stamping of the client order, pre-trade checks (mandate, restrictions, limits, cash and position availability, sanctions), execution under best execution obligations, capture on the order book, allocation to client accounts, confirmation and affirmation with the counterparty/CCP, clearing, and settlement - in most major markets now on a T+2 cycle, with some moving to T+1. Settlement is typically delivery versus payment; free-of-payment transfers carry principal risk.
Key controls: client orders are executed in turn and not traded ahead of for the firm's own book; aggregated orders are allocated fairly using a pre-stated method (usually pro rata or average price) recorded before the fill; errors and failed trades are logged, escalated, and where necessary bought in under market rules; corporate actions (dividends, splits, voting) are captured and reconciled to positions.
Traps
- Allocating the best fills to a favoured client or the firm's proprietary book after the fact - a classic abuse.
- Applying today's settlement date to a trade booked with a different trade date convention, producing a phantom fail.
- Forgetting that a client instruction limit is a client instruction unless the mandate permits discretion.
- Treating an unconfirmed trade as settled.
Rule of thumb
Record before you act, allocate by a rule set in advance. If the allocation method was not documented before execution, any favourable outcome becomes hard to defend.
Worked example: An order for three clients is filled in three tranches at 100.10, 100.30 and 100.50. Correct treatment is to allocate the volume-weighted average price pro rata across all three accounts, with the method recorded pre-trade. Giving the 100.10 fill to the largest client retrospectively is cherry-picking.