Equities: Markets, Trading and Settlement
Market structure and the trade lifecycle
Candidates must understand the equity trade lifecycle: order entry, execution, confirmation, clearing, and settlement. Know the roles of the exchange, alternative trading venues, the clearing house, and the settlement depository. Understand the standard settlement cycle, the meaning of trade date versus settlement date, and the consequences of a failed settlement. Know the difference between a principal trade and an agency trade, and how each affects the firm's disclosure obligations.
Concepts to master
Understand order types and their risk profiles: market, limit, stop, and iceberg or reserve orders. Know the rules on short selling, including locate requirements and the prohibition on naked shorting. Understand the concepts of best execution, order priority, and fair allocation. Know the difference between a crossed trade and a pre-arranged trade, and when each is permitted. Understand the treatment of corporate actions and the ex-dividend adjustment.
Traps
A frequent trap is confusing the trade date with the settlement date when calculating entitlement to a dividend. Another is assuming a limit order guarantees execution; it guarantees price, not execution. Watch for questions that blur the distinction between a short sale and a sale of securities the firm does not yet own but has a right to acquire. Also watch for scenarios where a trade is crossed at a price outside the prevailing market - that raises manipulation concerns, not merely best execution concerns.
Worked example
A client buys shares two business days before the record date. Under a standard settlement cycle, the trade settles after the record date, so entitlement depends on the settlement date, not the trade date. The correct answer identifies the client as not entitled unless the market convention provides otherwise.
Rule of thumb
For entitlements, ask when the trade settles; for execution quality, ask when the order was entered and what the market looked like.