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9.4.1 Trading Procedures

Detailed guide covering the trading procedures within the Canadian Securities Market, including the steps involved in retail securities transactions, and settlement procedures. Discover important concepts, detailed steps, and common scenarios in trading stocks, bonds, options, and other securities.

9.4.1 Trading Procedures

Introduction to Trading Procedures

Understanding trading procedures is crucial for anyone engaged in the securities market. Figure 9.2 provides a visual representation of a simplified securities transaction in a retail setting.

Figure 9.2 | A Retail Securities Transaction

    graph TD
	  A[Buyer] -->|Order| B[Investment Advisor]
	  C[Seller] -->|Order| D[Investment Advisor]
	  B -->|Order Transmission| E[Dealer Member A]
	  D -->|Order Transmission| F[Dealer Member B]
	  E -->|Trade Matching| G[Exchange or ATS/OTC]
	  F -->|Trade Matching| G
	  G -->|Trade Confirmation| H[Settlement Processor]
	  H -->|Settlement| E
	  H -->|Settlement| F

Types of Securities

  • Stock Exchange (Listed Securities):

    • Common Shares
    • Preferred Shares
    • Exchange Traded Fund
    • Income Trusts
    • Options & Futures
  • Alternative Trading Systems or Over the Counter (Unlisted Securities):

    • Bonds
    • Money Market Instruments
    • Unlisted Common and Preferred Shares

How a Typical Trade Occurs

Assume XYZ’s common shares are listed for trading on a stock exchange. No matter which exchange the trade takes place on, the major steps are the same.

  1. Participants: Each trade involves both a buyer and a seller (positions 1 and 2 in Figure 9.2).
  2. Interaction with Advisors: The buyer and seller decide their course of action after consultations with their investment advisors (positions 3 and 4).
  3. Quotation: Both advisors receive a current price quotation via communication links with the exchange. For instance, XYZ common is currently $10.50 bid and $10.75 asked.
  4. Decision-Making: The buyer knows the lowest price to buy XYZ stock is $10.75/share, and the seller knows the highest price to sell is $10.50/share.
  5. Instructions: Both clients instruct their advisors to get the best possible current price (market order).
  6. Order Relay: The orders are relayed to trading departments at dealer members.
  7. Trade Execution: The exchange’s system reports the trade, including time and the parties involved. Details are relayed to the original advisors, and written confirmation is mailed to respective clients.

Settlement Procedures

Once a trade is executed, both the buyer and the seller receive confirmations, and the transaction must be settled.

Buyer’s Confirmation

  • Includes purchase details and the amount payable, including commission.
  • If funds are available, the amount is withdrawn from the buyer’s account.
  • Otherwise, the buyer must provide sufficient funds by the settlement date (typically T+2).

Seller’s Confirmation

  • Shows details of the sale and the amount to be received after commission deduction.

In Canada, most securities are held electronically by a clearing corporation. At the end of each trading day, the clearing corporation settles all purchases and sales among dealers, ensuring accurate records.

Glossary

  • Bid Price: The highest price a buyer is willing to pay for a security.
  • Ask Price: The lowest price at which a seller is willing to sell a security.
  • Market Order: An order to buy or sell a security immediately at the best available current price.
  • Dealer Member: A member firm of a stock exchange or other marketplace involved in trading.
  • Clearing Corporation: An entity that facilitates the exchange of payments, securities, or derivatives, and ensures smooth settlement.

Key Takeaways

  • Basic Structure: Retail transactions involve both buyers and sellers communicating through their advisors to execute trades on the exchange.
  • Settlements: Transactions must be settled within a specified time frame, and most securities are held electronically.
  • Role of Investment Advisors: Advisors play a crucial role in relaying information, executing orders, and confirming transactions.

FAQs

Q1: What is the difference between listed and unlisted securities? A1: Listed securities are traded on official stock exchanges, providing liquidity and transparency. Unlisted securities trade on alternative platforms or over-the-counter, usually involving higher risks and less transparency.

Q2: What happens if the buyer doesn’t have sufficient funds for settlement? A2: The buyer must provide the required funds by the settlement date. Failure to do so can result in penalties or cancellation of the purchase.

Q3: How are securities mainly held in Canada? A3: In Canada, securities are predominantly held electronically by clearing corporations, simplifying the settlement process.

By understanding these trading and settlement procedures, market participants can navigate transactions more effectively and ensure compliance with regulatory requirements.


📚✨ Quiz Time! ✨📚

🧐 Assess and Solidify Your Understanding

Welcome to the Knowledge Checkpoint! You’ll find 10 carefully curated quizzes designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you’re on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

Good luck! 🍀💪

## Who are the primary participants involved in a retail securities transaction? - [ ] Central bank and regulatory authorities - [ ] Only the buyer - [ ] Only the seller - [x] Both the buyer and seller > **Explanation:** A retail securities transaction involves both a buyer and a seller, who may consult with their respective investment advisors. ## What is the buyer's action after learning the seller's price quotation in a retail securities transaction? - [ ] Ignoring the quotation - [ ] Adjusting the sale price - [ ] Placing a limit order - [x] Placing a market order to get the best possible current price > **Explanation:** Once informed of the seller's price, the buyer can instruct the investment advisor to place a market order to acquire the stock at the best current price. ## What type of securities are traded on the Stock Exchange, based on the diagram in Figure 9.2? - [ ] Bonds and Money Market instruments - [ ] Unlisted common and preferred shares - [x] Common Shares, Preferred Shares, ETFs, Income Trusts, Options & Futures - [ ] Only Over the Counter (OTC) securities > **Explanation:** According to the diagram, Common Shares, Preferred Shares, ETFs, Income Trusts, Options, and Futures are traded on the Stock Exchange. ## Which price does the buyer need to accept to successfully complete a trade? - [ ] The highest bid price anyone is currently willing to pay - [x] The seller's asking price - [ ] An average price of the bids - [ ] Any price lower than the seller's asking price > **Explanation:** A sale is possible if the buyer agrees to pay the seller’s asking price. ## What is the role of the stock exchange’s data transmission system during a trade? - [x] Reporting the trade details over the exchange’s ticker - [ ] Matching new buyers with potential sellers - [ ] Providing loan options for transactions - [ ] Adjusting the bid and ask prices > **Explanation:** The stock exchange’s data transmission system reports the trade details and provides specific transaction information to the buying and selling dealers. ## What information is included in the buyer's confirmation after a transaction? - [ ] Only the total number of shares purchased - [ ] Details of the seller's account - [x] Details of the purchase and the amount payable including commission - [ ] Future potential stock prices > **Explanation:** The buyer’s confirmation includes the details of the purchase, including the total amount payable and commissions. ## How are most stock and bond certificates held in Canada? - [ ] As physical paper certificates - [x] Electronically by a clearing corporation - [ ] In the form of bearer shares - [ ] Directly by individual investors > **Explanation:** In Canada, stock and bond certificates are primarily held electronically by a clearing corporation. ## By when should the buyer provide sufficient funds to settle a transaction? - [ ] On the trade date - [ ] One business day after the trade date - [ ] By the end of the month - [x] By the settlement date, two business days after the trade date > **Explanation:** The buyer must provide sufficient funds by the settlement date, which is two business days after the trade date. ## What are the implications if the buyer has sufficient funds on deposit for a purchase transaction? - [x] The amount will be withdrawn from the buyer’s account - [ ] The buyer does not need to settle the transaction further - [ ] The payment will be deferred to the next business month - [ ] The purchase will not be completed > **Explanation:** If the buyer has sufficient funds on deposit, the amount will be withdrawn from the buyer's account to settle the transaction. ## Who confirms the transaction to the buyer and seller after a trade? - [ ] The Central Bank - [ ] Only the stock exchange - [x] The respective investment advisors - [ ] A third-party broker > **Explanation:** After a trade, the investment advisors who originated the transactions confirm the transaction to the buyer and seller.

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