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Allocation Meaning

Defining specific allocation tools within the front-to-back workflow.

"Allocation" is easiest to understand in the context of the front-to-back trade workflow. After a trade is filled, several things may still need to happen to verify the account is correctly booked in the end account.

Understanding Your Needs

An "allocation tool" tends to mean different things to some people based on their specific needs and environment. This article explains the three main operational needs and how Theorem's solutions address them.

The Front to Back Path

As a trade progresses into an end account:

  1. A fill occurs at the exchange;
  2. The fill is captured by an allocation system;
  3. The allocation system splits the trade and generates files or messages that direct the executing broker to give the trades to the proper accounts at the proper clearing brokers;
  4. Those files or messages are normalized and sent to the executing and clearing brokers;
  5. The executing broker, clearing exchange, and clearing broker have their own procedures on how to take the normalized data to make the account get booked in the clearing account;
  6. A reconciliation system compares the result of step 5 with the result of step 3 to make sure that all trades were booked in the correct accounts.

"Create" - Trade Splitting

Capture

Before a filled trade can be allocated, the system that is doing the trade split must capture it into a data repository.

Fills may be captured from various places. There is no universal standard. Theorem's automation system captures fills from 

  • Executing Broker files in any format
  • Most FCMs
  • Client files
  • Trading apps

Splitting

Once a fill is captured into a data repository, it must then be split into component trades. Theorem's Intraday Trade Data Viewer allows for captured trades to be split via a UI and also with pre-defined share instructions that can apply to specific markets or suspense accounts.

The end result of the trade allocation splitting process should be data or files, sometimes referred to as allocation files, that contain all of the clearing account monikers, quantity, trade price, security identifiers, and venue information that is required.

"Submit" - Trade Processing

Normalization and Transmission

Allocation files are usually not created by the executing brokers. Each executing broker has different capabilities and policies. Many require allocation files to adhere to rigidly defined formats. Some executing brokers need to onboard allocation files with their internal processes that could take days or weeks.

Exchange Process

Once a file is taken in by an executing broker, the fills migrate through:

  • The executing broker's internal allocation processing system
  • Executing broker's clearing exchange interface to give up the trade
  • Clearing broker's clearing exchange interface to accept trades given to it
  • Clearing broker's internal clearing system to properly book accepted trades

"Verify" - Trade Reconciliation

Depending on the amount of markets, accounts, trading volume, executing and clearing brokers, an end-of-day reconciliation system can be a simple check out process or a must have operational risk management solution.

Theorem addresses the verification step with it's matching engine inside the Data Viewer. All trade allocation instructions (whether generated from Theorem's allocation system or an external system) can be sent to Theorem's app where the matching engine provides the reconciliation status on each allocation instruction, such as 

  • Straight Out - allocations that are in the allocation file but have not yet arrived in the clearing account;
  • Discrepancies - such as Account Discrepancy, indicating that a trade has been booked but is different than the instruction file's details;
  • Complex Situations where trades exist on all sides but it is not clear what the problem might be. In this cases, our exception reporting and exports allow users to work through the issues.

Working with Partners

Theorem's features can be used to support one particular allocation activity. For example, if a trader is generating their own allocations but does not have an allocation processing solution, Theorem can be used to support the normalization and transmission process.

The inbound and outbound automation features allow for data from upstream systems to come into Theorem's app and for allocation results, if required, to be sent downstream.

Theorem can also be used as an end-to-end solution to support all automation tasks.

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