The Trade Lifecycle: Behind the Scenes of the Trading Process

16

Developing Processes for New Products (and Improving Processes for Existing Products)

16.1 WHAT IS A PROCESS?

We consider a process to be an activity performed on a trade or related to the existence of a trade. Examples of processes are:

• book trade in a system

• calculate fair value of a trade

• settle a trade

• stress test a trade under different scenarios of market conditions.

Processes run the entire business of trading. These occur at all stages of the trade lifecycle. They can be automated by computers, operated by human hand or a mixture of both. Later in this chapter, we will discuss the building and running of a brand new process, but before that we will describe a common situation in many financial entities.

16.2 THE STATUS QUO

There is an old joke about a man who is asked how to get from Liverpool to Birmingham: he answers, “if you want to go to Birmingham, don’t start from Liverpool!” Many organisations have a complete tangle of existing processes and anyone trying to rationalise them would be better off starting again from scratch. Let us try to understand why processes very often turn into a tangled and disorganised mess and in doing so, we will see how difficult it can be to build and maintain processes for a trade lifecycle.

16.3 HOW PROCESSES EVOLVE

Stage 1 - toe in the water: a typical foray into the trading of new products or trading in new markets begins with a trader and a spreadsheet, possibly with some client enquires. The trader analyses the market ...