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What happens after the trade?

In most traders' minds, a trade ends with the "Filled" banner in the broker app. In reality, the actual settlement chain only begins after that:

Execution (fill at the exchange) → Clearing (netting and risk assumption by CCP) → Settlement (money and securities actually change ownership).

Between execution and settlement, depending on the asset and region, there are 1–2 business days. During this time the clearing house bears the risk of one side defaulting.

T+1 and T+2

Clearing House (CCP)

The Central Counterparty steps between the two trading parties after execution and becomes the counterparty to both sides. This eliminates direct counterparty risk: regardless of whether the opposite side goes bankrupt — the CCP guarantees settlement through margin deposits of all clearing members and a default fund.

Counterparty Risk

Without a CCP you would have to settle each trade individually with your counterparty and hope they don't go bankrupt.

Custodian & Central Securities Depository

Securities are no longer physically moved today — they exist as book entries at Central Securities Depositories (CSDs).

Your broker holds your custody account at one or more of these CSDs. Importantly: in Germany, client portfolios are legally held as Segregated Assets, separate from the broker's own assets — in the event of broker insolvency, your shares remain your property.

Deposit Protection

The most important distinction that many investors overlook:

Exceptions: Non-EU brokers without corresponding regulation (offshore CFD providers, some crypto platforms) do not fall under these protection schemes. There, your assets are legally at risk.

💡 With German brokers such as Trade Republic, Comdirect or DKB, your shares are typically held at Clearstream — they remain your property even in the event of broker insolvency, because they are Segregated Assets not forming part of the insolvency estate.

What is an Index?

An index is a basket of equities, bonds or commodities that serves as a benchmark for a market or segment. It is calculated from the individual prices of its members according to a fixed methodology and is updated continuously. Indices are not tradeable products — but there are futures, ETFs and options on them.

Key functions: market barometer ("how is the overall market doing?"), performance comparison ("do I beat the index?"), and basis for passive investments (index ETFs).

Price Index vs. Performance Index

• Price Index (Price Return): Only price movements of the members are included — dividends are ignored. Examples: Dow Jones Industrial Average, Nikkei 225, Euro Stoxx 50, S&P 500 in its commonly quoted form. The index thus systematically understates the real investor return.
• Performance Index (Total Return): Dividends are mathematically reinvested. Examples: DAX, MSCI World TR, S&P 500 Total Return (SPXTR). More realistic return indicator — typically this adds 40–60% additional total performance over 20 years compared to the price variant.

Important regarding news quotes: When "S&P 500" appears in financial media, it almost always refers to the price variant. The DAX, on the other hand, is always quoted as a performance index. In direct DAX ↔ S&P 500 comparisons the S&P appears to lag — because apples are being compared with oranges.

Weighting

• Market-cap weighted: Heavyweights dominate the index. Examples: S&P 500, DAX, MSCI World. In the S&P 500, Apple, Microsoft, NVIDIA, Amazon, Alphabet and Meta together account for roughly 30% (as of 2026).
• Price weighted: The share with the highest nominal price counts most — regardless of company size. Examples: Dow Jones Industrial, Nikkei 225. UnitedHealth at ~$500 nominal price weighs more in the Dow than Walmart at ~$70 — even though Walmart has twice the market cap. Anachronistic, but historically grown.
• Equal weighted: Each share receives 1/N weighting. Example: S&P 500 Equal Weight ETF RSP. Reduces concentration risk, often outperforms in broad rallies, underperforms in mega-cap-driven bulls.
• Float-adjusted: Only the freely tradable portion counts. Government or family blocking minorities are excluded. All major modern indices are float-adjusted.

Major Indices at a Glance

Free Float

"Free float" = the proportion of shares that is actually freely traded on the market. Government stakes, family blocking minorities and strategic holdings are excluded because they effectively contribute nothing to liquidity. Example: Porsche SE holds 31.9% of Volkswagen ordinary shares — this stake does not flow into the DAX weighting for Volkswagen. Effect: the "index weight" of a company often deviates significantly from pure market capitalisation.

Rebalancing & Index Effect

Indices are regularly reviewed and adjusted for changes:

• DAX: Quarterly (March, June, September, December); rule changes since 2021 (40 instead of 30 members, profitability criterion).
• S&P 500: No fixed dates, but ad-hoc plus quarterly rebalancing of weightings.
• MSCI World: Semi-annually (May and November) with additional quarterly adjustments.

When members are added or removed, the index effect arises: all passive ETFs must buy the new members and sell the old ones — often at defined closing prices. This creates measurable price effects in the days before and after the change.

Classic historical example: Tesla's S&P 500 inclusion in December 2020. Tesla rose roughly +70% in the three months before the inclusion as arbitrageurs front-ran the rebalancing.

Concentration Risk

Market-cap-weighted indices structurally suffer from concentration at the top. The Magnificent 7 (Apple, Microsoft, NVIDIA, Amazon, Alphabet, Meta, Tesla) together account for over 30% of the S&P 500 (as of 2026). An ostensibly "broad" index is therefore effectively a concentrated mega-cap tech basket.

Historical comparison: back in 1980 the top 10 held around 18% weight. Concentration today is higher than ever.

💡 An "MSCI World" ETF is effectively a US ETF with a topping of other markets due to its ~70% US weighting — it is "global" in name only. Anyone seeking genuine global diversification should supplement with Emerging Markets and small-caps.

Trading Sessions

A typical US trading day consists of several phases that differ significantly in liquidity and spreads. Times in CET (winter) or CEST (summer, −1 hour):

• Pre-Market: from approx. 10:00 CET — thin liquidity, wide spreads, usually only limit orders permitted.
• Opening Auction: 15:30 CET — all accumulated orders are matched at a single opening price.
• Continuous Trading: 15:30–21:55 CET — the regular main trading session with the tightest spreads.
• Closing Auction: 21:55–22:00 CET — another batch auction to determine the closing price.
• After-Hours: until approx. 02:00 CET — thin again; earnings reports typically appear here.

European exchanges (Xetra, Euronext, LSE, SIX) follow analogous phases from 09:00 CET with an opening auction, continuous trading and a closing auction at 17:30.

Opening & Closing Auctions

During these time windows all incoming orders are not matched immediately but collected. At the end of the auction phase the exchange calculates the price at which the maximum volume can trade — all buyers offering at least this price and all sellers asking at most this price are executed.

The closing auction often has the highest single-session volume of the day: index ETFs, mutual funds and institutional rebalancers explicitly want to trade at the official closing price. Anyone using Market-on-Close (MOC) necessarily participates here.

Circuit Breakers (US equity market)

Following Black Monday 1987 (Dow −22.6% in a single day), market-wide circuit breakers were introduced. They halt trading during extreme declines in the S&P 500:

They were last triggered in March 2020 (Corona crash, Level 1 multiple times). In Europe, similar market-wide mechanisms exist whose thresholds vary by exchange.

Limit-Up / Limit-Down (LULD)

Protection for individual stocks against extreme swings. Each stock has a dynamic price band (±5 to ±10% depending on tier and price bracket), calculated over a rolling 5-minute average. If the band is breached, a 5-minute halt is triggered.

Introduced after the Flash Crash on 6 May 2010, during which individual stocks such as Accenture briefly fell to $0.01 — LULD is meant to prevent such algorithmic slip-ups.

Trading Halts

In addition to market-wide and stock-specific safeguards, individual stocks can be deliberately paused:

• T1 (News Pending): A material announcement is imminent (earnings, M&A, insolvency). Typically 5–30 minutes, allowing investors to process the release.
• T2 (News Released): Trading resumes after the announcement — often with a large gap.
• LUDP / Volatility Halt: Automatic 5-min halt following an LULD breach.
• Regulatory: The SEC or exchange suspects market manipulation, insider trading, or is awaiting a corporate announcement.

Regulation — Overview

MiFID II — what retail investors feel

The Markets in Financial Instruments Directive II (in force since 3 January 2018) has fundamentally reshaped the EU retail market. Practical effects for private investors:

• Ex-ante cost disclosure: Before every order the broker must disclose all costs (spread, fees, ETF TER, ongoing costs) concretely.
• Best Execution Policy: Brokers must publish on which venues they route orders — and why.
• Record-keeping obligation: Telephone investment advice must be recorded and archived for 5 years.
• Product governance: Manufacturers and distributors must define a product's target market. PRIIPs KID is mandatory.
• PFOF ban: Payment for Order Flow has been prohibited EU-wide since 1 January 2024.

KID / PRIIPs

The Key Information Document (KID, colloquially also "BIB" in Germany) is a standardised product information sheet. Maximum 3 pages, mandatory for all "packaged" investment products (PRIIPs — Packaged Retail and Insurance-based Investment Products): ETFs, structured products, funds, certificates, insurance-based investment products.

Contains:

• SRI (Summary Risk Indicator) on a scale of 1–7
• Performance scenarios (stress, pessimistic, moderate, optimistic)
• Costs over holding periods of 1/3/5 years
• Recommended minimum holding period
• Complaint options

💡 If your broker rejects an order with "KID not available" — this typically applies to US ETFs without EU approval. Workaround: EU-approved equivalent (often from the same issuer, e.g. Vanguard US Total Stock Market → Vanguard FTSE All-World UCITS) or an equivalent options strategy.