Trade Lifecycle – Foreign Exchange
Now that you have a basic understanding of the overall lifecycle process and its importance, let us first understand the pre-trade and post trade process of the trade lifecycle.
Trade Lifecycle – Pre-Trade
Pre-trade is the process by which a trader decides on the type of trade he or she plans to make. Typically the trader well versed in either technical or fundamental analysis or both studies the markets prior to making the trade and decides on factors such as long or short position, entry price, Â stop loss, take profit, tenor and so on.
Once the trader decides on these variables he/she goes ahead with the trade execution. A dealer performs hundreds of trades a day acting as both a price maker and taker. A trader in an investment bank or hedge fund has sophisticated infrastructure to perform these trades. They have high end, expensive front office system like Reuters or Bloomberg dealing and price terminals, they have communication access to other dealers and brokers to keep abreast of all market developments and participants. That is why in this course we suggest joining a community of traders such as the Facebook group for this course.
â€œPrior to initiating FX transactions, a Non-Dealer Participant should perform a thorough assessment of its foreign currency activities within the context of its business and financial strategy. The risks associated with engaging in activities with respect to FX transactions â€“ including market, liquidity, credit, legal, operational, regulatory and settlement risks â€“ need to be identified, quantified and managed. Additionally, where applicable, a Non-Dealer Participant should also familiarise itself with the risks associated with trading in FX transactions involving restricted currencies, including, without limitation, the ability to divest local assets.
All Non-Dealer Participants should ensure that they engage sufficient and experienced personnel to execute their FX transaction mandate. Each group or individual playing a role in the FX transaction process flow should have a complete understanding of how FX transactions are initiated, recorded, confirmed, settled, collateralised and accounted for. â€œ – The Federal Reserve Bank
As a dealer you should have clear stop loss policies depending on your risk appetite and financial situation. Keep a dealer pad or blotter that clearly outlines the purpose of the trade, expectations, stop loss, take profit, outstanding position, total PnL etc. We will look at this in more detail during the money management sessions.
Next we look at how a deal is done in the interbank market
Trade Lifecycle – The Trade
FX traders typically deal on the Reuters or Bloomberg dealing terminals which are dedicated network lines connecting banks to facilitate dealing over the counter.Â
Reuter’s Dealing System – Source Reuters
Typically a deal conversation between 2 dealers (assume one sitting in Sydney and another in London) is as simple as
Dealer 1 –Â JPY 10
Dealer 2 – 22 25
Dealer 1 – Yours
Dealer 2 – I buy JPY 10 at 113.22
Dealer 1 – thx
Dealer 2 – thnx n bi
Once the deal is done on Reuters, the dealing system is usually connected to a back office system that enters deals with all the essential details of the deal such as – counterparty bank, rate, currency pair, value date and auto populates the standard instructions such as – payment instructions, trade date. The back office confirms these deals with the counterparts and dealers pad which is part of the clearing cycle.
Next in the trade lifecycle post completion of the trade the transaction follows the clearing process.