LIFE CYCLE OF A TRADE

•Monique S. Botkin, Investment Adviser Association, Moderator•Christopher Marzullo, Brandywine Global InvestmentManagement•Alpa Patel, U.S. Securities and Exchange Commission•Steven W. Stone, Morgan, Lewis & Bockius, LLP

Life Cycle of a Trade

Post-Pre-tradeprocesses

Trade LifeCycle

Post-trade

processes

Tradeerrors

Types of Traded Investments

EquitiesFixed

Income

Derivatives(swaps,futures,options)

Currencies

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Pre-Trade Processes

Broker Selection Soft dollararrangements

Broker Selection

• Due diligence

• Broker vote

• Affiliated brokers(agency, agency crossand principal trades)

Soft dollararrangements

• Reasonabilitydeterminations

• Agreements withbrokers and providers

Trade Life Cycle

Building theorder

Placing theorder

• Selection ofbrokers orvenues

Monitoringexecution

quality

Allocationto clientaccounts

Settlementwith clientcustodians

Building the Order

Excludingineligible

accounts (IPOs,securities with

Order nettingfor sameaccounts

Order

Orderaggregation

acrossaccounts

securities witheligibility

restrictions)

accounts

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Trade Life Cycle

Building the order Placing the order Monitoring Allocation to Settlement withBuilding the order Placing the order

•Selection of brokersor venues (e.g., ATSs)

•Sequencing

Monitoringexecution quality

•Explicit and implicitcosts (opportunityshortfall)

•Transaction costanalysis

Allocation toclient accounts

•Partial fills

•Fails

Settlement withclient custodians

•Reconciliations

Post-trade Processes

Monitoring bestexecution

Trading surveillance

• Insider trading

• Manipulation & windowdressing • Monitoring broker

performance

Monitoring softdollararrangements

• Commission levels

• Mixed useallocations

dressing

• Cross trades & use of affiliatedbrokers (and capacity)

Trade Errors

What happened?Whose error and

cause?Breach of duty of

care?

Did the error involveinvestment decision-

making orimplementation?

Did the error involve abreach of clientimposed or legal

restriction?

How handle (bust,move position,

reverse in market,have broker cover)?

Inform client?

How calculate anyloss (de minimis,

opportunity costs,windfalls, netting,highest measure)?

How reimburse aclient for a loss?

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Heat Map of Trader’s Concerns

Hot

• Too much SEC focus on equitytrades, need more scrutiny fixedincome trading

• HFT being considered as non-impactful to markets

Hotter

• Finding meaningful, accountspecific TCA "apples to apples"

• Information leakage via executionvenues

• Short swing profits

Hottest

• Affording technology needed tocompete

• Sourcing natural liquidity

• Insider trading

• Hidden liquidity aggregationimpactful to markets

• Filing miscues

• Effects of gaming

• Challenging process to upgrade/change best of breed OMS/EMSs

• Efficient Use of Pre-, Post-, andReal-Time TCA

• Finding liquidity

• Counter party risk

• Short swing profits

• Best execution

• Drastic increase in non-tradingresponsibilities

• HFT

• CSAs/ways to reduce executingbrokers

• Integrating New TradingTools/Strategies on the Desk

• Algorithm/high-touch variation oftrades

• Measuring performance

• What is the right TCA measure forthe group

• Hidden liquidity aggregation

• Monitoring our brokers executionlogistics

• Fragmented markets

• Need for more flexible Multi-benchmark TCA

• Managing/UnderstandingRouting/ Order-HandlingProcedures

• Identifying which systems to add/keep on desk

• Budget/Paying soft dollars andresearch

• Resource consumption by ourPMs and Analysts

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Source: TraderForum, Top issues facing buyside traders (February 12, 2010)

SEC Enforcement Actions

• Best Execution

• Market Manipulation

• Principal Trading• Principal Trading

• Soft Dollar Payments

• Trade Allocation

• Cross Trading

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