Have you ever wondered how a few clicks on the POS terminal transforms you into a property owner, holder of a set of shareholder rights? Let’s take a look at this magic. To do this, we will understand how a brokerage company works and what role trading terminals play.
Front office
The trading terminal is the main tool that we use to make transactions. This can be QUIK, a mobile application, MetaTrader, or more exotic options. The trading terminal is designed for reliable and high-speed information exchange between the client and the broker. As a rule, such terminals have a built-in pre-trade control that does not allow the user to make an obvious mistake. For example, place an order for an amount greater than the available collateral (for trading without leverage), or at a multiple of the current market price, or on the wrong account. After you have placed an order, it goes to the broker, who broadcasts it to the trading organizer – the exchange.
On the exchange, orders live in the “order book” in the form of offers-offers to make a deal on terms no worse than those announced. If at least two opposite orders appear in the “book”, which satisfy each other according to the conditions, the deal is registered. The “core” of the exchange trading system is responsible for this process on the exchange. It processes tens of thousands of transactions every second, so the IT component of the exchange must meet the highest requirements. To do this, load tests are periodically organized on weekends, during which the infrastructure is subjected to maximum loads to assess its resource intensity.
Also, exchanges and brokers pay close attention to the continuity of customer service. Most market participants have primary and backup IT servers to connect customers, and the exchange even has a backup physical office in case of an emergency.
For clients using high-frequency algorithms for trading, the speed of submitting transactions and obtaining exchange information is critical. Therefore, they try to locate their computing power as close as possible to the exchange, reducing the speed of information transfer to a minimum. For this, special exchange client servers are rented to install HFT client algorithms on them.
Middle office
After the deal is concluded, information about it is broadcast to the broker in real time, and the client sees it in the terminal. These data and current quotes are used to calculate risk parameters (portfolio value, margin, collateral assessment, amount of available funds). If the amount of collateral falls below the critical value, the broker’s risk managers perform forced closing deals to limit the size of the client’s possible losses.
When the moment of settlement comes, the clearing center takes over. He calculates the amount of funds and assets required for settlements between counterparties, and sets the appropriate requirements to brokers. If at some point the broker is unable to pay off its obligations, the clearing center has the right to independently sell the broker’s assets or forcibly conclude a transfer of obligations (special repo or swap transactions).
Back office
As a result of trading, the exchange and the clearing center send brokers official reports containing information on all transactions they have concluded and settlements made. This information is loaded into accounting systems, based on it, clients’ assets are calculated, transactions performed are reflected, commissions and taxes are calculated. Using internal accounting data, the broker generates reports for clients and regulatory reporting. The depository uses information from the clearing center to reflect transactions on clients’ accounts following the results of exchange trading and also sends reports to depositors.
It all started with your click in the terminal. Amazing, right?
