Pool execution

When a portfolio manager decides to buy a stock for many clients, it has to get the order to the market somehow. The workbook describes two popular models of execution.

Pool execution means trading for all clients together and then allocating individual securities to each client's demat account. One large order goes out; the shares that come back are divided up.

The alternative is trading in individual client name. Each client's order is placed separately, so allocation happens automatically — the trade is already in that client's name.

Pooling saves cost. The price is a fairness risk: once shares are bought in a pool, someone has to decide who gets what. Most of the rules around pool execution exist to take that decision out of anyone's discretion.

The two models (Chapter 7, section 7.5).

Allocation rule (Chapter 7, section 7.5.3). The portfolio manager shall ordinarily purchase or sell separately for each client. When purchases or sales are aggregated for economy of scale, allocation must be pro rata at the weighted average price of the day's transactions, with no open position in allocation at day end.

Written policy (Chapter 8, section 8.2.1). The portfolio manager must have a policy — approved by the Board or equivalent body — specifying the specific (not generic) situations in which orders are placed for each client individually or pooled from the trading account of the portfolio manager; the scenarios in which deviation from the intended allotment is permissible; and how margins or collateral are segregated among clients without affecting any client's interest. Deviations only on account of exigency, with prior written approval of the Principal Officer and Compliance Officer.

Execution controls (section 8.2.3). A dealing team places and executes all orders: recorded lines or authorised emails only, no mobile phones in the dealing room, restricted internet and entry. For equity, equity-related instruments and mutual fund units, managers with AUM of ₹1,000 crore or more under discretionary and non-discretionary services must have an automated system for order management and allocation of securities to each client. Every order placement, execution and allocation carries an audit trail and time stamp.

Illustrative clients, quantities and prices; the rules are the workbook's.

A discretionary portfolio manager decides to add a bank stock across its model portfolio. Forty clients need a total of 20,000 shares.

Model 1 — individual client name. Forty separate orders go out. Client 1's 500 shares fill at ₹1,200, client 17's at ₹1,206. Each fill already belongs to that client. No allocation step.

Model 2 — pool execution. The dealing team places one order for 20,000 shares from the portfolio manager's trading account. It fills in two lots:

Weighted average price = ₹2,40,80,000 ÷ 20,000 = ₹1,204. Every one of the forty clients receives their pro rata share at ₹1,204 that same day, credited to their own demat account.

What the dealer may not do is put the ₹1,200 lot into the largest accounts. And if an exigency required deviating from the intended allotment, it would need prior written approval from both the Principal Officer and the Compliance Officer, with the rationale recorded.

Chapter 7 (Role of Portfolio Managers), section 7.5, introduces pool execution as one of the two execution models under "Administration of investor's portfolio", and section 7.5.3 sets the pro rata, weighted-average-price allocation rule. Chapter 8 (Operational Aspects of Portfolio Managers, 13% weightage) adds the written policy, dealing team, automation threshold and audit trail requirements. For a distributor, this is the answer to a client who asks how they know they got a fair price.

• Pool execution needs an allocation step; individual-name trading does not.
• Separate orders per client are the "ordinary" rule in the regulations; aggregation is permitted for economy of scale.
• Allocation is pro rata at the weighted average price of the day — not at the best or worst fill.
• No open position in allocation at the end of the day.
• The policy must name specific situations, not generic ones, and needs Board approval.
• Deviations need both the Principal Officer and the Compliance Officer, in writing, in advance.
• ₹1,000 crore AUM is the automation threshold.