9.4.1 Trading Procedures

9.4.1 Trading Procedures

Introduction to Trading Procedures

Understanding trading procedures is crucial for anyone engaged in the securities market. Figure 9.2 provides a visual representation of a simplified securities transaction in a retail setting.

Figure 9.2 | A Retail Securities Transaction

    graph TD
	  A[Buyer] -->|Order| B[Investment Advisor]
	  C[Seller] -->|Order| D[Investment Advisor]
	  B -->|Order Transmission| E[Dealer Member A]
	  D -->|Order Transmission| F[Dealer Member B]
	  E -->|Trade Matching| G[Exchange or ATS/OTC]
	  F -->|Trade Matching| G
	  G -->|Trade Confirmation| H[Settlement Processor]
	  H -->|Settlement| E
	  H -->|Settlement| F

Types of Securities

• Stock Exchange (Listed Securities):

  • Common Shares
  • Preferred Shares
  • Exchange Traded Fund
  • Income Trusts
  • Options & Futures

• Alternative Trading Systems or Over the Counter (Unlisted Securities):

  • Bonds
  • Money Market Instruments
  • Unlisted Common and Preferred Shares

How a Typical Trade Occurs

Assume XYZ’s common shares are listed for trading on a stock exchange. No matter which exchange the trade takes place on, the major steps are the same.

1. Participants: Each trade involves both a buyer and a seller (positions 1 and 2 in Figure 9.2).
2. Interaction with Advisors: The buyer and seller decide their course of action after consultations with their investment advisors (positions 3 and 4).
3. Quotation: Both advisors receive a current price quotation via communication links with the exchange. For instance, XYZ common is currently $10.50 bid and $10.75 asked.
4. Decision-Making: The buyer knows the lowest price to buy XYZ stock is $10.75/share, and the seller knows the highest price to sell is $10.50/share.
5. Instructions: Both clients instruct their advisors to get the best possible current price (market order).
6. Order Relay: The orders are relayed to trading departments at dealer members.
7. Trade Execution: The exchange’s system reports the trade, including time and the parties involved. Details are relayed to the original advisors, and written confirmation is mailed to respective clients.

Settlement Procedures

Once a trade is executed, both the buyer and the seller receive confirmations, and the transaction must be settled.

Buyer’s Confirmation

• Includes purchase details and the amount payable, including commission.
• If funds are available, the amount is withdrawn from the buyer’s account.
• Otherwise, the buyer must provide sufficient funds by the settlement date (typically T+2).

Seller’s Confirmation

• Shows details of the sale and the amount to be received after commission deduction.

In Canada, most securities are held electronically by a clearing corporation. At the end of each trading day, the clearing corporation settles all purchases and sales among dealers, ensuring accurate records.

Glossary

• Bid Price: The highest price a buyer is willing to pay for a security.
• Ask Price: The lowest price at which a seller is willing to sell a security.
• Market Order: An order to buy or sell a security immediately at the best available current price.
• Dealer Member: A member firm of a stock exchange or other marketplace involved in trading.
• Clearing Corporation: An entity that facilitates the exchange of payments, securities, or derivatives, and ensures smooth settlement.

Key Takeaways

• Basic Structure: Retail transactions involve both buyers and sellers communicating through their advisors to execute trades on the exchange.
• Settlements: Transactions must be settled within a specified time frame, and most securities are held electronically.
• Role of Investment Advisors: Advisors play a crucial role in relaying information, executing orders, and confirming transactions.

FAQs

Q1: What is the difference between listed and unlisted securities? A1: Listed securities are traded on official stock exchanges, providing liquidity and transparency. Unlisted securities trade on alternative platforms or over-the-counter, usually involving higher risks and less transparency.

Q2: What happens if the buyer doesn’t have sufficient funds for settlement? A2: The buyer must provide the required funds by the settlement date. Failure to do so can result in penalties or cancellation of the purchase.

Q3: How are securities mainly held in Canada? A3: In Canada, securities are predominantly held electronically by clearing corporations, simplifying the settlement process.

By understanding these trading and settlement procedures, market participants can navigate transactions more effectively and ensure compliance with regulatory requirements.