Post trade allocation: how much are bunched orders costing your performance?

TL;DR

This paper systematically examines the risks and issues of post trade allocation in bunched orders, revealing how current practices can lead to unequal account returns and proposing a solution for uniform allocation.

Contribution

It provides the first systematic analysis of trade allocation risk and introduces a novel method to ensure fair and uniform return distribution across accounts.

Findings

Return divergences often persist or increase with more transactions.

Current allocation practices can lead to unfair distribution of returns.

Proposed solution supports uniform return allocation regardless of trade size or account number.

Abstract

Individual trade orders are often bunched into a block order for processing efficiency, where in post execution, they are allocated into individual accounts. Since Regulators have not mandated any specific post trade allocation practice or methodology, entities try to rigorously follow internal policies and procedures to meet the minimum Regulatory ask of being procedurally fair and equitable. However, as many have found over the years, there is no simple solution for post trade allocation between accounts that results in a uniform distribution of returns. Furthermore, in many instances, the divergences between returns do not dissipate with more transactions, and tend to increase in some cases. This paper is the first systematic treatment of trade allocation risk. We shed light on the reasons for return divergence among accounts, and we present a solution that supports uniform allocation of return irrespective of number of accounts and trade sizes.