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Phases In The Life-cycle Of An Equity Order


Retail equity investors or traders place orders to buy a specific quantity of a specific stock at a specific price point/threshold within a specific time frame. The stock trade happens in trillions per day in a country like India, and the transactions happen in just a few seconds with quite a deal going under the hood from the time an order is placed to the time it is completed. This post details the life-cycle of a typical equity order from the time it is placed in an app by an investor to the time he get to see that the order is "complete" to learn of its status.

Below are the 10 phases in the life-cycle of an equity stock order from the time it is placed by a customer on their app:

  1. (Trade) Order Placement: Customer places a buy/sell order on their trading app or platform.
  2. Order Validation: The broker platform's Order Management System (OMS) validates the order details (like symbol, quantity, price, etc.) against customer account details (like balance, position etc). At the very least, the OMS checks the customer's Trading Account balance to ensure you have sufficient funds for the purchase (stock price x quantity) along with any associated fees. Pre-funded trading account with sufficient balance paves way for faster and smoother order validation. Transferring funds from the Linked Bank Account can take some time to complete before order validation thus delaying the ordering process.
  3. Order's Risk Assessment: The validated order is routed to the broker's Risk Management System (RMS) that evaluates the risk associated with the order (in case of Margin Order, that would be margin requirements, position limits, etc.). Buying on margin is borrowing money from the broker for intra-day sale of purchased stocks. RMS also performs various risk calculations (usually Value at Risk aka VaR, which is a statistic that quantifies the extent of possible financial losses within a firm, portfolio, or position over a specific time frame). RMS decides whether to accept, reject, or modify the order based on risk constraints.
  4. Order Routing/Transmission: The OMS routes the approved order to the exchange (NSE/BSE) or another trading venue through the broker's membership gateway.
  5. Order Receipt: The exchange receives the order and assigns a unique order ID.
  6. Order Matching: The Stock Exchange's matching engine attempts to match the order with existing orders in the market.
  7. Order Execution: If a match is found, the order is executed, and a trade confirmation is generated by the Stock Exchange.
  8. Trade Confirmation: The trade confirmation is sent back to the broker's OMS, which updates the customer's account records and then notifies the customer via the app.
  9. Order Settlement: The OMS generates settlement instructions to facilitate the transfer of securities and funds. The trade is cleared and settled through the clearing corporation (NSCCL/ICCL) and the depository (NSDL/CDSL). When the trade is settled, the securities are transferred to the customer's Demat Account.
  10. Order Completion: The order is marked as complete in the OMS, and the customer's account is updated to reflect the new position. The customer is also notified of the final status.

These phases and activities in each of the phases, may vary slightly depending on the country, broker, exchange, order type and market conditions. For instance, in the case of a non-margin order (aka Cash/Delivery Order), as there is no margining/leverage involved, the RMS performs a limited set of checks like:

  • Verifying the customer's account balance to ensure sufficient funds to settle the trade.
  • Checking for any trading-restrictions or blocking on the customer's account.
  • Performs basic risk checks, like ensuring the order size is within allowed limits.

The OMS and RMS play a crucial role in managing the order life-cycle, ensuring that orders are executed efficiently, and customers' accounts are updated accurately. Technically speaking, some brokers have RMS as distinct services from OMS while others have it integrated as part of OMS; and notes on this deserves a dedicated post.

Segregating the life-cycle in the classical sense of front, middle and back office activities

Phase 1 involves the App (Mobile/Web) which the investor interacts with.

Phases 2,3 and 4 are typical Front-office activities in classic brokerage terms. This involves Broker houses and these services/systems are hosted by them.

Phases 5,6 and 7 happen in Stock Exchange.

Phases 8,9 and 10 involves both Middle-office and Back-office activities. These services are hosted by Broker houses and involves interaction with Clearing & Depository Houses (think regulatory bodies).