Trading DealsFor some people who engage in trading, the tasks they might know would simply involve calls and a click of a mouse or a button. But there are many things that happen behind each trade being made. What happens behind every buying and selling may actually be quite complicated. Here is a brief look on how a typical trade happen from behind the scenes.

Main Types Of Trades

Traders usually engage in two main types of trade. When making trades, investors usually deal with either a principal trade or agent trade. They have their differences and it is important for one to know how they work to have a better understanding of the whole trading process.

Principal Trading

Principal trading may involve a brokerage that buys securities in the secondary market then holds them for a certain period of time and eventually sell them. The main purpose of principal trades is for the firms to create profits for the portfolios they handle by way of price appreciations. When a certain investor buys or sells stock through a brokerage firms that acts as the principal, the fir usually uses its own current inventory to fill up the buy or sell order. This is a way for the firms to earn extra income.

Agency Trading

Another popular method used by brokerage firms to handle buy orders from clients is through agency trading. This involves a more complicated approach. It might require the firs to search and then the transfer of certain wanted securities between clients coming from different brokerages. This method can make accurate bookkeeping, clearing and reconciliation of securities as they change hands quite a challenge.

Agency trades usually are comprised of two parts. One is bringing a client request to the appropriate market to find another party willing to take the opposite position. If a client order is to buy a certain security at a certain price, the brokerage would try to find someone willing to sell the same security at the same volume and price. One both parties connect and makes the exchange, the transaction is recorded on its ticker tape. The exchange of securities and money occurs on the settlement.

The second part of the trade occurs after the agency transaction occurs. After the exchange has been completed and properly documented, the trade has to go through a process known as clearing. It involves the basic act of matching the buys and the sells to make sure that accurate tracking is observed. This job is usually handled by a different and larger institution tasked to overlook into this complicated matter and make things fair for all parties concerned. This job is handled in North America by the Depository Trust Clearing Corporation or DTCC. It provides a way to streamline the exchange made during agency transactions by acting as a middleman to overlook the accuracy and timely delivery of the transactions. A typical transaction usually takes around three days to clear.