Trade execution fundamentals

Trading is where our investment decisions become real. A well-designed portfolio, a perfect allocation, a brilliant tax strategy — all of it means nothing if the trades are executed incorrectly. This lesson covers the fundamentals of how we execute trades at Minerva.

The three-step trade process

Step 1: Proposal (Eclipse iRebal)

Eclipse iRebal compares each client's current allocation to their target model and proposes the trades needed to bring them into balance. The system considers:

• Target allocation bands (typically ±5%)
• Minimum trade size thresholds (we don't rebalance for trivial drift)
• Tax-lot selection in taxable accounts
• Cash reserve requirements (always maintain the specified cash buffer)
• Wash-sale rule compliance (no repurchase of substantially identical securities within 30 days of a loss harvest)

The proposals are generated in batch during quarterly rebalancing or ad-hoc for individual client events (new funding, distribution, model change).

Step 2: Review (Advisor approval)

Every trade proposal must be reviewed and approved by the responsible advisor before execution. The advisor checks:

• Does the trade make sense given the client's current situation?
• Are there any tax considerations iRebal might not be aware of? (expected income spike, pending charitable donation, estimated tax payment timing)
• Are there any wash-sale rule issues from recent tax-loss harvesting?
• Is the client expecting a large cash flow that would make rebalancing premature?

The advisor signs off in the trade management system. Trades without sign-off cannot proceed.

Step 3: Execution (Operations)

Once approved, operations submits the trades to the custodian. For our standard index fund trades:

• Market orders are used for highly liquid ETFs (S&P 500, Total Market, etc.) during normal market hours
• Limit orders are used for less liquid ETFs or during volatile markets
• Mutual fund orders are placed at NAV (net asset value) and execute at market close
• All orders are placed between 10:00 AM and 3:30 PM ET to avoid the volatility of market open and close

Tax-lot selection

In taxable accounts, which specific shares we sell matters for taxes. Minerva uses specific identification — selecting individual tax lots to sell based on the most tax-advantageous outcome.

The hierarchy:

1. Loss lots first — Sell shares at a loss to generate tax-loss harvesting benefits (check wash-sale rule compliance first)
2. Long-term gain lots — If we must sell at a gain, sell lots held over one year (taxed at the lower 15–20% capital gains rate)
3. Highest-cost lots — Among long-term lots, sell the highest-cost-basis lots first to minimize the gain
4. Avoid short-term gains — Lots held under one year are taxed at ordinary income rates (up to 37%). We avoid selling these unless absolutely necessary.

Eclipse iRebal automates most of this, but the advisor must verify tax-lot selection during the review step, especially for large rebalancing trades.

The double-check protocol

Trade errors are among the most serious operational risks at an RIA. Common errors include:

• Wrong account (trading in spouse's IRA instead of the client's)
• Wrong fund (buying international when U.S. was intended)
• Wrong quantity (extra or missing zero)
• Wrong direction (buying when the proposal called for selling)

Our protocol: before submitting any trade batch, a second team member independently verifies the trade details against the approved proposal. This is not optional, and "I was in a hurry" is not an acceptable reason to skip it.

If a trade error occurs:

1. Stop. Do not attempt to fix it without notifying a supervisor.
2. Document the error immediately in the trade error log.
3. The supervisor determines the corrective action (reversal trade, client notification, compliance reporting).
4. The client is never financially harmed by our error — we absorb the cost.

Trade documentation and reconciliation

Every executed trade must be:

• Recorded in the trade blotter with date, time, account, fund, quantity, price, and approver
• Reconciled against the custodian's trade confirmation within 24 hours
• Flagged immediately if any detail doesn't match

The trade blotter is a compliance requirement and an audit trail. Incomplete records are a regulatory finding.

Key takeaways

1. Every trade follows three steps: proposal (iRebal), review (advisor), execution (operations). No step is skippable.
2. Tax-lot selection uses specific identification: losses first, then long-term gains, then highest-cost basis. Avoid short-term gains.
3. The double-check protocol requires a second team member to verify every trade batch before submission.
4. Trade errors are never absorbed by the client — Minerva takes the loss.
5. All trades must be documented in the trade blotter and reconciled with custodian confirmations within 24 hours.

Glossary

• Eclipse iRebal — Minerva's automated rebalancing tool that generates trade proposals based on target allocations and tax considerations.
• Specific identification — A tax-lot selection method where the investor (or advisor) chooses which specific shares to sell, rather than defaulting to FIFO or average cost.
• FIFO (First In, First Out) — A default tax-lot method that sells the oldest shares first. Minerva does not use this method; we use specific identification.
• Trade blotter — The log of all executed trades, including date, account, fund, quantity, price, and approver. Required for compliance and audit purposes.
• Wash-sale rule — IRS rule prohibiting a tax loss deduction if you repurchase a substantially identical security within 30 days.
• NAV (Net Asset Value) — The per-share value at which mutual fund orders are executed, calculated at market close each day.
• Double-check protocol — Minerva's requirement that a second team member independently verify trade details before submission to the custodian.