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Execution Time: The Ten Steps in a Trade

Step 10. Clearing Up the Trade Step 10. Clearing Up the Trade

Step 10. Clearing Up the Trade


To settle the trade, the parties involved use a clearing firm.


Funds are moved from the buyer’s account to the seller’s account.


The buy-side firm uses a custodian as an intermediary for the clearing of the trade.


SOURCE: Cisco Systems

Step 9. Reporting Back Step 9. Reporting Back

Step 9. Reporting Back


After a trade is executed, the matching engine sends a notice of execution report back to the sell-side firm.

Step 8. Going Direct Step 8. Going Direct

Step 8. Going Direct


In some cases, a sell-side broker gives its customers (the buy-side trading firm) direct access to the market.


In this case, the buy-side firm triggers the trade.


The buy-side firm uses the sell-side firm’s infrastructure to perform the pre-trade risk check and then execute the order.

Step 7. Getting Closer Step 7. Getting Closer

Step 7. Getting Closer


To speed up the matching process, a sell-side firm places its strategy engines and pre-trade risk systems at the execution venue.


The trade in that case goes to the matching engine via an exchange cross-connect.


This is a high-speed connection between co-located market participants and the exchange systems.

Step 6. Matching the Order Step 6. Matching the Order

Step 6. Matching the Order


The order is sent to the matching engine of the execution venue.


The engine pairs sell orders with buy orders of the same quantity; and, vice versa.


Step 5. Placing the Order Step 5. Placing the Order

Step 5. Placing the Order


The order is sent in FIX format to a Financial Information Exchange (FIX) gateway at the exchange or other execution venue.


The venue sends back an acknowledgement message.


The round-trip time for the acknowledgment is measured by monitoring tools to determine if the execution venue is fast enough.


The order management system might cancel the trade, if the round-trip time is too high.

Step 4. Processing a Trade Step 4. Processing a Trade

Step 4. Processing a Trade


If it passes the risk check, the trade is sent to an Order Management System.


The system logs the order and passes it to a computer known as a smart order router. This system chooses which exchange or venue in which to execute the order.


The decision is based on price, available liquidity, speed, cost and other criteria.


Records of the criteria used and result achieved are kept for compliance reasons. The idea? Prove that the “best (possible) execution” of the order was achieved.

Step 3. Triggering a Trade Step 3. Triggering a Trade

Step 3. Triggering a Trade


A trading engine processes the data and triggers a trade if pre-set conditions are met. The trade goes to a risk management application, as a checkpoint.

Step 2. Sucking In Data Step 2. Sucking In Data

Step 2. Sucking In Data


The buy-side and other users of market data pull in the data from their own market data messaging buses.


The consumers can be strategy engines, algorithmic trading applications, pricing engines and pretrade risk management applications.


Buy-side firms take in the data to manage risk and model portfolios, generally.

Step 1. Pushing Out Data Step 1. Pushing Out Data

Step 1. Pushing Out Data


Exchanges, alternate trading venues and market data providers send out pricing information to market participants.


NYSE Euronext, Nasdaq OMX Group, Thomson Reuters and Bloomberg are all major suppliers of high-speed data on trades.


Market data is taken in by feed handlers at a sell-side firm.


The data gets cleaned up and sent back out to the buy-side and other consumers, using a market data messaging bus on a server.


Execution Time: The Ten Steps in a Trade Execution Time: The Ten Steps in a Trade

Execution Time: The Ten Steps in a Trade


BATS Global Markets now acknowledges orders in 200 millionths of a second or less. Nasdaq OMX Group says it has deployed technology in Scandinavia that takes that down to 100 microseconds – and 1 million messages a second.


All told, sell-side firms will spend $14 billion this year to speed up how fast they can execute orders, according to Tabb Group. At stake: Millions of dollars in trading profits, on an annual basis. Per millisecond.


Here’s a step by step look at what goes into high-performance execution of a trade, in every fraction of a second.


SOURCE: Cisco Systems, “High Performance Trading Fabric”

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