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STP in Institutional Trading
— Step 2: Allocation
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An Investment manager
typically represents several clients, and each client
retains ownership of the securities obtained through
their manager. The investment manager usually groups
orders for several clients into one big order to gain
better prices for those clients. This creates the need
for each completed trade to be allocated (i.e.,
divided) according to the proportion of the original
order consumed by each client account, so the trades
can settle. For each trade, the allocations must be
calculated, then grouped for and sent to each broker
and custodian involved in the trade.
In Canada today, much of
this allocation reporting between the Investment
Manager, Broker and Custodian is automated through a
system operated by private service provider firm. Their
system calculates allocations, then groups them by
broker and custodian, sending to each counterparty an
electronic file. For investment managers, brokers or
custodians not subscribing to this service provider,
the same grouping process is done, but the information
is sent to the appropriate counterparties by fax,
e-mail or telephone. Most Canadian brokers need to
submit the allocations they receive to their back
office system for submission to CDS. Today most of that
process is manual or semi-automatic (e.g., a macro or
application run manually to create and submit a flat
file to the back office).
The brokers send their
copy of the allocated trades through to CDS by way of
their back office service providers. Those back office
systems add calculated information such as commission,
accrued interest, etc., and identify which trades go to
which custodian based on the settlement instructions
for those trades. Each investment manager, broker and
custodian keeps standing settlement instructions for
each investment manager account, identifying which
custodian gets the allocated trades for each
account.
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