Weighted average price
Total cost of a day's aggregated purchases (or sales) divided by total quantity — the price at which a portfolio manager must allocate aggregated trades to clients, pro rata.
In plain language
A portfolio manager with fifty clients who all need the same stock can place fifty small orders, or one large one. The large order is cheaper — the workbook calls it aggregation for economy of scale — but it creates a fairness problem. The big order fills at several prices through the day. Who gets the cheap shares and who gets the expensive ones?
The regulation's answer: nobody gets a better price than anybody else. Every client receives the weighted average price of the day's transactions, and quantities are shared out pro rata.
That way no client is favoured, and the manager has no room to hand the best fills to a favoured account.
How it works
The rule (Chapter 7, section 7.5.3, Don'ts item 11). The portfolio manager shall ordinarily purchase or sell securities separately for each client. However, in the event of aggregation of purchases or sales for economy of scale, inter se allocation shall be done on a pro rata basis and at weighted average price of the day's transactions. The portfolio manager shall not keep any open position in respect of allocation of sales or purchases effected in a day.
Controls around it (Chapter 8, sections 8.2.1–8.2.3).
- A written policy must specify the situations (not generic) in which orders are placed for each client individually or pooled from the trading account of the portfolio manager, and when deviation from intended allotment is permissible.
- Deviations only on account of exigency, with prior written approval of the Principal Officer and Compliance Officer and a detailed rationale. Policies are approved by the Board or equivalent.
- A dealing team places and executes all orders from a restricted dealing room.
- For equity, equity-related instruments and mutual fund units, managers with AUM of ₹1,000 crore or more under discretionary and non-discretionary services need an automated system with minimal manual intervention, including allocation of securities to each client.
- An audit trail of order placement, execution and allocation, with time stamping.
The formula
Weighted average price = Σ (quantity × price of each execution) ÷ Σ quantity
Client allocation = (client's order ÷ total orders) × quantity executed, all at the weighted average price.
A worked example
Illustrative prices and quantities; the allocation rule is the workbook's.
A portfolio manager aggregates orders from three clients for a stock: Anita 6,000 shares, Balaji 4,000, Charu 2,500 — 12,500 in total. By the close it has bought 10,000:
| Execution | Quantity | Price | Cost |
|---|---|---|---|
| 1 | 6,000 | ₹500 | ₹30,00,000 |
| 2 | 3,000 | ₹505 | ₹15,15,000 |
| 3 | 1,000 | ₹510 | ₹5,10,000 |
| Total | 10,000 | ₹50,25,000 |
Weighted average price = ₹50,25,000 ÷ 10,000 = ₹502.50
Only 80% of the orders were filled (10,000 ÷ 12,500), so each client gets 80% of their order:
| Client | Ordered | Allocated (80%) | Cost at ₹502.50 |
|---|---|---|---|
| Anita | 6,000 | 4,800 | ₹24,12,000 |
| Balaji | 4,000 | 3,200 | ₹16,08,000 |
| Charu | 2,500 | 2,000 | ₹10,05,000 |
| Total | 12,500 | 10,000 | ₹50,25,000 |
What is not allowed: giving Anita the 6,000 shares at ₹500 and leaving Charu with the ₹510 fill, or holding back 1,000 shares unallocated overnight. All 10,000 are allocated the same day — no open position.
Why NISM asks about it
The rule is in Chapter 7 (Role of Portfolio Managers), in the list of don'ts for portfolio managers, and Chapter 8 (Operational Aspects of Portfolio Managers, 13% weightage) adds the policy, dealing team, automation and audit trail requirements. Chapter 9's sample question 3 uses "allotting shares to each investor for the purchases made during the day" as a distractor — knowing what trade allocation means is exactly what separates it from asset allocation.
Common exam traps
- Separate orders per client are the ordinary rule; aggregation is the exception, for economy of scale.
- Weighted average, not simple average. Averaging ₹500, ₹505 and ₹510 gives ₹505 — wrong; quantities must weight the prices.
- Pro rata allocation, not first-come or largest-client-first.
- Weighted average of the day's transactions — not a multi-day average.
- No open position in allocation at the end of the day.
- Deviation from intended allotment needs prior written approval of both the Principal Officer and Compliance Officer.
- ₹1,000 crore AUM triggers the automated allocation system requirement.
Where this is taught
- Series XXI-B · Chapter 7: Role of Portfolio Managersintroduced here
- Series XXI-A · Chapter 7: Role of Portfolio Managersintroduced here
Related terms
- Principal officerThe named individual at a non-individual intermediary who carries personal regulatory responsibility for the advisory business, and who must personally hold the prescribed qualification and NISM certification.
- Compliance OfficerThe separately appointed officer of a merchant banker, listed company or intermediary who monitors compliance with securities law, handles investor grievances, and reports non-compliance to SEBI independently.
- Portfolio managerA body corporate registered with SEBI that, under a contract with a client, advises on or manages that client's securities or funds — discretionary, non-discretionary or advisory.
- Dealing teamThe team a portfolio manager must constitute to place and execute all orders under its written policies, working from a restricted dealing room with recorded lines and full audit trails.
- Pool executionA PMS execution model: trading for all clients together and then allocating securities to each client's demat account — as opposed to trading in each client's own name.