In the investment world, you will often hear people talk about the importance of trust. The reality is that all investment markets are based on trust. We usually take issues such as trade execution and clearing services for granted, but these are the foundations of any investment. Akin to a jigsaw, there are numerous areas of an investment market to consider.
Trading services
Whether you are a short-term execution-only trader with access to direct market services or a client who deals electronically via a broker platform, you must have complete trust in trade execution services. Once investors begin to question the efficiency and viability of a particular platform/trading system this can very often be the beginning of the end. This is where several issues come into play:-
1. Speed of execution
Latency is the measure of speed by which your trading instructions are passed to the market and executed. Consequently, it would be best if you looked to target low latency execution-only services where there is a minimal time delay. This ensures that you can deal promptly, which can be invaluable in fast-moving markets.
2. Stock clearing services
There is a lot going on behind the scenes of any broker that many of us take for granted. Stock clearing services are one of these activities, the ability to deliver stock to the buyer to fulfil a sale. Thankfully, today, the vast majority of stock is held in electronic format, which allows for a relatively quick settlement.
3. Delivery of funds
Whether an execution-only trader or an advisory client, your broker must be able to deliver funds to the central clearing system. This ensures that sellers are paid for stock acquired,promptly and efficiently. This action is especially important for execution-only day traders who need to match up purchase and sale settlement dates to maximise their funds available for investment.
4. Safe custody
The advent of the Internet has changed how we trade and access global markets. In most cases, your broker will directly control your electronic stock account. However, holding your stock through third-party safe custody arrangements may bemore efficient when dealing with some overseas markets. This can be critical to local clearing services, which is why we only work with industry-leading partners here at Global Investment Strategy UK.
Market liquidity
If you look at any stock market worldwide, there is a direct correlation between liquidity and investor trust in the market itself. It is fair to say that trust breeds trust, while contempt breeds contempt in the investment world. Liquidity is a direct reflection of the ability to deal efficiently at market prices and guarantee delivery of stock and funds. This will in turn attract execution-only day traders looking for relatively quick turns. They can also improve liquidity which is a key element for institutional investors.
Due to how central settlement systems are set up, even default by a member broker won't have a material impact on the settlement of outstanding transactions. It is in the best interest of all parties to retain and maintain the highest level of trust going forward.
Summary
Trust in any stock market is dependent upon clearing servicesand trade execution which will, in turn, increase liquidity and efficient market pricing. The greater the liquidity, the more attractive these markets are to institutional investors, who will be able to buy and sell in decent size. This attracts new listings and even greater liquidity, and the cycle begins again. This is why new investment markets often find it challenging to secure a firm footing; competing with markets with deep-seated liquidity and highly efficient clearing services is not easy.