Trade allocation

A large institutional client, such as a mutual fund house or a hedge fund, does not always trade for a single account. It may run twenty different schemes at once, each needing a slice of the same trade.

Rather than placing twenty separate small orders and risking twenty different execution prices, the front office places one large order and sorts out later which scheme gets how much. That sorting-out step is trade allocation.

It happens in the back office, after the trade is done, using instructions the front office passes along in a document called a deal sheet.

The workbook (Chapter 3, section 3.4.2) explains that for institutional trades, the front office may enter a single order for a client using the CP code "INST", and then distribute it across the client's various sub-schemes at the back-office end.

The method of splitting the trade — pro rata, all-or-nothing, or another basis — is agreed between the institution and the broker. Once the trade data reaches the back office, the back-office user receives deal sheets from the front office showing how to allocate the trade to individual schemes, and then allocates the trade accordingly and generates the appropriate contract note for each scheme. Brokers must also upload the allocation details to the clearing corporation.

This process links directly to the INST trade mechanism at the clearing level: an order entered under the "INST" CP code must be allocated to the correct categories within the time specified by the exchange or clearing corporation, and for FPIs, INST allocation is permitted only to related FPIs.

A hedge fund manager runs four schemes — A, B, C and D — and instructs its broker to buy 40,000 shares of a listed company in one go, entered with CP code "INST".

The order executes fully at an average price of Rs 512, a total value of Rs 2,04,80,000.

The front office's deal sheet instructs a pro rata allocation: Scheme A gets 40%, Scheme B gets 30%, Scheme C gets 20% and Scheme D gets 10%.

The back office generates four separate contract notes, one per scheme, all at the same average execution price of Rs 512, and uploads the allocation to the clearing corporation so each scheme's obligation is recorded correctly for settlement.

Chapter 3 (section 3.4.2, Trade Allocation) sits between trade enrichment and the clearing and settlement process, and explains why institutional trades use a single order followed by a back-office split. Chapter 5's treatment of the "INST" CP code and its allocation timelines builds directly on this section.

• Allocation happens after execution, in the back office — it does not change the price at which the trade was executed.
• The CP code used for the un-allocated order is "INST", not the institution's own custodial participant code; the real allocation to individual schemes comes later.
• The allocation basis (pro rata, all-or-nothing, etc.) is decided beforehand and recorded on the deal sheet — the back office does not choose it on its own.
• Brokers must upload allocation details to the clearing corporation, not just generate contract notes internally.
• Do not confuse trade allocation (splitting one trade across sub-schemes of the same client) with trade enrichment (adding settlement and tax details to a trade already assigned to one client).