How Trades Are Processed
Step 1: Taking the order
The Securities and Exchange Commission (SEC) requires that anyone who takes an order be licensed to do so. This changed in the 80s; previously sales assistants were able to take client orders. This was done to prevent errors (and fraud).
Step 2: Inputting the order
Depending on how the company runs, most stock orders are still handled via a paper transaction. This means the salesperson writes up the trade on a transaction sheet. In the case of mutual fund companies, this is often done after the fact (see below). The transaction sheet is then turned over to the person who is responsible for inputting the order. In some cases (such as the company being a market maker in a particular stock or in the case of bond orders) these orders are placed by telephone with the main office of the stock broker.
Step 3: Receiving confirmation
The SEC requires that all transactions be processed as soon as they are received (unless they are stop orders or “on close" orders). The confirmation of the trade being complete is normally received by the order input person in less than 5 minutes. The stockbroker would then be notified of the completion of the trade and would notify the client.
Step 4: Payment information
There is a settlement date that those who invest in stocks, bonds or mutual funds must abide by. This date is three business days for stocks and bonds while other transactions are same day settlement.
Step 5: Owner of record
The securities are registered in the name of the owner as of the date a trade is complete. Today, most stocks and bonds are held in what is called “street name" which is a generic account for the benefit of the shareholders of a firm.
It is important to understand that this is a typical course of action when handling stock trades. Most mutual fund trades work in a different manner. If a customer has a direct account with a mutual fund company, in most cases, they send money directly into the mutual fund and it is deposited in their accounts. Many customers own mutual fund shares that they have purchased through a stock brokers office, these are funds that are traded on the stock exchange. Companies like Mass Mutual, Putnam and Fidelity also offer customers the option to mail checks into them and they are processed directly into their accounts.
Note: Each investment company works in a slightly different manner, but these steps make up the general process.