Documentation
Settlement Basics
An introduction to Settlement.
How Conventional Electronic Markets Operate
Many electronic markets exist for things like stocks and shares, commodities, and derivatives. Conventional financial markets commonly operate through brokers and clearing arrangements, with participant accounts used to manage cash and delivery obligations.
The function of a conventional exchange can be broadly explained as two distinct steps. The first step is receiving and matching orders, and this is referred to as Price Negotiation. The second step is updating accounts and ensuring delivery, and this is called Settlement.
Separating Price Negotiation from Settlement
This system is an electronic market platform that provides the Price Negotiation step. Orders from traders are matched against each other, and Fills are generated to record the executions.
Settlement is out of scope for this system. Responsibility for settlement is handed to the parties involved in the execution. This means this system does not manage accounts for participants, and does not enforce the fulfilment of trade agreements.
This might seem like a problem at first, until we consider that most businesses are already routinely performing settlement with their customers on a daily basis. The only difference is that, for most businesses, the price of the product is fixed. Once a trade is agreed at the fixed price, the business will handle payment and delivery. Settlement is the management of payment and delivery, and each business has its own settlement workflow appropriate to its business domain.
Abstraction and Security
By handing settlement responsibility to the client, this system can add the benefits of price negotiation as a plug-in step to the normal workflow of a business.
The mechanics of price negotiation are not tied to what is being negotiated. This system can abstract the negotiation away so that it can be applied to any two Tradeable Items.
Only the agreed price changes. The process of settlement, the fulfilment workflow that is specific to each business, remains exactly the same.
This system does not need to hold payment, customer identity or other business-critical information. This reduces the amount of sensitive business data exposed to the platform and avoids adding payment and identity data to its attack surface.
Settlement Tracking
When two Orders match and execute, each Order has a Fill record created to record that execution. The Fill records have a SettlementState field that can be used to track the off-system settlement progress.