Trading system: automated trading

Because many countries are adopting the ATS system of trading, it is useful to describe the system in some detail. An ATS system generally is a major upgrade from an "open outcry" floor trading system and fundamentally changes the structure of trading to:

• Continuous order-driven market with central market principles.

• Dual trading capacity, complemented by member firms voluntarily acting as market makers.

• Fully negotiable brokerage with clients.

The essence of an ATS trading system is as follows:

• The core of the system is the central order book (termed the "book").

• The book is accessed by remote trading workstations linked to the ATS (computer) system (i.e. the broker-dealer companies' offices and branch offices).

• Broker-dealers from over the country enter orders at their workstations. These orders have four elements to them: time of entry on system, size of order (number of shares), price and buy or sell.

• The orders of the broker-dealers are instantly included anonymously in the order book. All broker-dealers have access to this information.

• All deals on the system are available to the broker-dealers, making the full depth of the market discernible.

• The book is split into bid (buying) and offer (selling) sides and is organised on the principle of priority. Orders on the book are prioritised in terms of price, followed by time within price. The bid with the highest price and the offer with the lowest price are placed ahead of lesser orders.

• The computer system constantly seeks to match the bids and offers. It compares new orders with those in the book, and executes trades whenever the terms of the orders match. Where volumes do not match, but the price does, a deal is executed, with the balance of the volume remaining on the order book.

• Matched trades are advised immediately to the broker-dealer.

Mechanics of dealing (from point of view of client)

Clients wishing to buy or sell shares do so with companies/firms that are members of the exchange. The process of buying and selling shares (from the point of view of the client) is straightforward. In the case of buying shares, the (private) client follows the steps:

• The first step is to find a broker-dealer, i.e. a member of the exchange, with whom the client feels comfortable. "Feels comfortable" means that the member has a similar investment philosophy as the client, i.e. a similar view in respect of investment horizon, quality of shares to deal in, risk profile, etc. It is also important that the client trusts the broker-dealer unreservedly, and is prepared to divulge his personal wealth profile to him/her.

• Brokerage is negotiated, for example 0.25% of the consideration of the deal.

• The client and his broker discuss the shares to be purchased or the portfolio to be managed. The relationship with the broker can take on many forms:

- Buying and selling upon client instruction.

- Buying and selling upon client instruction after the advice of the broker-dealer has been sought.

- Non-discretionary portfolio management by the broker-dealer (i.e. where the broker-dealer manages the portfolio, but is obliged to seek the client's approval before the deal is executed).

- Discretionary portfolio management, (i.e. where the broker-dealer has full discretion and does not need the sanction of the client before a deal is executed).

• A decision is made in respect of shares to be purchased (personally or for the portfolio; assume the former), and price P.

• The client instructs the stockbroker to purchase 1 000 of the shares of Company XYZ at price P.

• The stockbroker's company/firm opens an account with the exchange (i.e. on the BDA32 system) in the name of the client.

• The broker-dealer instructs another broker-dealer in the employ of the company/firm to execute the order at price P, i.e. enter the order into the ATS system.

• An alternative is for the broker-dealer to advise the client to have price limits (above and below price P) within which the broker-dealer has carte blanche to deal. They decide to deal at price P only.

• The broker-dealer enters the order on his trading workstation (computer), and this is transmitted instantaneously onto the central order book managed by the trading system.

• The system seeks a matching opposite order (i.e. a sell order), and finds one.

• The deal is done at price P and the broker-dealer informs the client by telephone. A broker's note follows a day after the deal (T+1).

• The deal is cleared and settled (see next section).

• The client pays within 5 business days (T+5).

• The Transfer Secretary (TS) of Company XYZ records the change in shareholding in the company's share register.

• The CSD (if there is one) records the change in ownership.

• The share certificate (in the case of non-dematerialisation) follows after a few weeks. In the case of dematerialisation, the TS will forward an electronic confirmation of ownership.

In the case of the selling of shares, the mechanics is similar, except that the client has to deliver to the broker the share certificate, and sign a transfer deed (STF referred to before) (in the case of non-dematerialisation). This renders the shares sold transferable. The client receives payment within 5 working days of the sale (T+5).

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