Outsourcing of Investment Operation

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In a smaller fund management firm, the back office operation is usually outsourced to external parties such as custodian bank. Some fund managers will call the broker and place the order themselves instead of hiring a trader. As the firm’s Asset Under Management (AUM) getting bigger, then a trader is added to the team so that the trader will be responsible for managing various brokers and monitor trade execution done by the brokers. Eventually, the front office team will include fund managers and fund manager support staff. The trading team will include a second trader and some trading support staff. 

The fund managers and traders are the essential team members to the investment firm, although some larger companies have outsourced its support operation overseas. For example, some fund managers may outsource some of its data analysis work to companies in India. However, it is rare for fund management firm to outsource other front office support operation. 

For middle and back office operation, we need to ask if we need to outsource them or do it in-house. Please note that because of the arrangement of using custodian bank to hold the portfolio asset, it usually doesn't cost much for the custodian bank to provide fund accounting services and portfolio valuation service. However, such custodian bank may not provide in-depth performance analysis.

The advantage of outsourcing the back office operation is that you are free from the problem of staffing the back office team, managing them and managing the back office operation. The management will also be free from investing in investment technology and IT staff. In addition, it gives client some assurance for mitigating fraud risk since the fund management and the back office operation is not done by the same company. 

The disadvantage is that you do not hold the investment data and there is not much you can do for data analysis except to rely on the standard report. Additional costs is required if you want to transfer the investment data back to you for data analysis. However, custodian banks are gearing up to provide additional services such as performance analysis. 

The cost of outsourcing the back office operation is cheap compare to setting up your own back office operation especially if your AUM is small. As your AUM grows to a certain amount, it might be feasible for you to setup a back office operation and mirror the investment data. 

Please note that base on a dollar to dollar comparison, it might not be feasible to outsource the back office operation. The management should consider hidden cost such as the efforts on managing additional staff, cost of operational mistakes and cost of managing the technology.

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Fund Valuation

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Another task for the fund accounting team is valuation of the portfolio. Valuation is an exercise to estimate the value of the portfolio using the closing market price of the valuation day. The main component is the closing price. For global account, exchange rates is another main component. It is a common practice to use London 4 pm exchange rate as the standard exchange rate.

Valuation (Trade Date)

Most valuation is based on trade date. This means that if we bought some shares on the valuation day. We would consider it as our holdings even though the actual settlement happens later. We would proceed to place the valuation using the market closing price.

Fund managers, traders, clients and other investment parties all uses trade date valuation.

Valuation (Settlement Date)

Valuation based on settlement date reflects the actual transaction of the securities and cash payment. Once a BUY trade is made, the securities would be posted as receivables and the equivalent cash is posted into cash payable. Only when the securities are place with the custodian, then the securities are considered as asset.

Although settlement date valuation is seldom used, it provides an accurate picture of the cash movement for a portfolio. It also allows fund managers to know the actual cash on hand.

Gross and Net Valuation

When valuing a portfolio, we can price the total asset plus the management fees. This type of valuation is known as gross of fee valuation. Some clients would like to know the actual fund valuation after taking into consideration of management fees and other expenses. Net of fees valuation is basically total fund valuation less accrued management fees and other accrued fees.

A standard valuation report sum up all assets, value at the closing market price of the valuation day, including all cash position using standard exchange rate (London 4 pm) plus all the receivables (such as cash dividend) and less all the fees payable. Therefore a standard valuation report is a net of fees valuation.

Sometimes, fund manager would like to know the fund valuation gross of management fee since the management fee is the largest component of the expenses. Some fund managers would argued that management fee is part of the earned return unlike custodian fee which is a necessary cost of operation. To calculate gross of management fee, you just need to add the accrued management fees to the net valuation.

Profit and Loss Statement

Before we proceed to discuss about profit and loss we need to consider how we should value the cost of our asset. If a portfolio bought GE at $15 for 50,000 shares, the cost of asset would be 15 x 50,000 + commission and other transaction expenses. What happen if this portfolio bought GE at different time and at different price?

Assume that Portfolio A bought GE at various periods as shown (assuming transaction cost of 2.1%):

	GE		P X Qty	Trans Cost	Tot Cost
May-05	$35	20,000	$700,000.00	$14,700.00	$714,700.00
Jun-06	$37	15,000	$555,000.00	$11,655.00	$566,655.00
Apr-07	$32	30,000	$960,000.00	$20,160.00	$980,160.00
		65,000			$2,261,515.00

Total cost of GE would be about $2.26 million. Based on the total cost if we divided $2.26 million with 65,000 shares, the average cost per share would be $34.79.

What happen if there is a sell trade? How do you account for that? There are two methods, the first is to use average pricing and the second method is to use Fist-In-First-Out (FIFO) method.

Average Pricing

As we have computed earlier the average price of GE is $34.79. If we sell 20,000 share at $12, the net proceed after taking into consideration of 2.1% expenses (commission and tax) would be $234,960. Based on the average cost of $34.79; the net loss is $234,960 - (20,000 x $34.79) = $234,960 - $695,850.77 = -$460,890.77    

FIFO Method

Fist-In-First-Out method will not use average costing. Any share we sell will be deducted from the first block of share we bought. Therefore we are selling the first 20,000 shares based on the cost of $714,700. The net loss will be $234,960 - $714,700 = -$479,740.00.

As you can see the net loss is different depending on the costing method. There are additional costing methods such as Last-In-First-Out (LIFO) and activity based costing which is seldom used in traditional fund management business.

    

The computation of profit and loss is to compute each sale of securities less the cost of security. The net gain and net loss in aggregate will be your total trading profit or loss. Interest income from your fixed income securities and cash dividend are also considered as profit.

One example of the profit and loss statement would be:

Profit and Loss Statement for Portfolio A

Income

Sales of Securities                  xxx

Less: Cost of Securities          xxx

Trading Gain / (Loss)                                 xxx

Interest Income                                          xxx

Cash Dividend                                            xxx

Income Receivables                                   xxx

Less: Expense

Management Fees                                     xxx

Other expenses                                          xxx

Interest expenses (margin a/c)                   xxx

Traditionally, assets are value at cost. Therefore, the profit and loss statement will be reported based on historical costing method. The fund valuation used earlier does not based on historical costing approach; instead it is mark to market value.  There will be significant differences when you compare the valuation report against the profit and loss statement based on historical costing approach.

We can also use mark-to-market approach for profit and loss statement. First the remaining securities on our assets ledger should be value at market prise. Since the asset is computed based on cost, the differences between the market value and cost would be unrealized gain (loss). We posted the unrealized gain (loss) into a separate earnings ledger. Such item will be incorporated into the income statement as shown

Income

Sales of Securities                  xxx

Less: Cost of Securities          xxx

Trading Gain / (Loss)                                 xxx

Interest Income                                          xxx

Cash Dividend                                            xxx

Income Receivables                                   xxx

Less: Expense

Management Fees                                     xxx

Other expenses                                          xxx

Interest expenses (margin a/c)                   xxx

                                                                  -----

Profit (Loss)                                                xxx

Unrealized Capital Gain (Loss)                   xxx

In normal accounting, the profit will be posted to retained earnings ledger; however, in portfolio investment, all available cash must be reinvested. Therefore, it is meaningless to maintain a retained earnings ledger. The profit will be only reflected in the income statement.

Unrealized capital gain (loss) will be posted in a special ledger similar to an income ledger. This item will also be posted on the balance sheet together with equity.

 

Balance Sheet

For balance sheet, we would have securities asset, cash account, cash receivables, asset receivables, income receivables listed as assets. Liabilities would be asset payable, cash payable and accrued expenses.

The valuation of cash, cash receivables, income receivables, accrued expense is straight forward. Valuation of asset payable, resulting from sales transaction, will be based on the net settlement amount.

To value the securities asset and asset receivables, we would value them based on the transacted cost. For mark-to-market balance sheet, the securities will be value at market price and the differences will be posted as unrealized gain or loss.

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Corporate Action

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Corporate action is an event initiated by a public company that affects the equity of the company.

The most common corporate actions are stock split, bonus issue, rights issue, cash dividend and stock dividend.

Stock Split

A 2-for-1 stock split means that every share will be split into 2. This does not affect the net worth of the stock owner.

A company with 1,000,000 outstanding shares in the market will increase to 2,000,000 shares after a 2-for-1 stock split. The price will be reduced by half; therefore, if the share price is $50 before the stock split, then the new price will be $25.

The purpose of such an exercise is to increase liquidity as more shares are circulated in the market while the value of the equity does not change.

The effect of stock split is that the par value of each stock is reduced; there is no change in capital reserve of the company and there is no change in the shareholder’s net worth.

Bonus Issue

Bonus issue is similar to stock split except that the additional share is not split from existing share but it is funded by capital reserve or retained earnings.

A 1 for 1 bonus issue means that a company give addition share for each share a stock holder owned. A company with 1,000,000 outstanding shares in the market will increase to 2,000,000 shares after a 1-for-1 bonus issue. The price will be reduced by half; therefore, if the share price is $50 before the bonus issue, then the new price will be $25. However, the capital reserve or retained earnings will be reduced.

The effect of bonus issue is that the par value of each stock remains unchanged; there is a reduction in capital reserve of the company and there is no change in the shareholder’s net worth.

Stock Dividend

Stock dividend is another way for a company to pay shareholders from its capital reserve. However, stock dividends are given more regularly than bonus issue.

Similarly stock dividend will result in reduction of price since additional stock is being paid out from the capital reserve.

A company with 1,000,000 shares announce a stock dividend of 5%. This means that every stock owner would received 5 shares for every 100 shares owned. The total shares of the company will be 1,050,000. If an investor owned 1000 shares, then the total share ownership will be 1050. Similar to bonus issue, it will not increase the net worth as the price will be adjusted lower to account for the dividend issue. If the share price is $50 then the new share price is $47.50.

The effect of stock dividend is that the par value of each stock remains unchanged; there is a reduction in capital reserve of the company and there is no change in the shareholder’s net worth.

Cash Dividend

Cash dividend is another payout from the company to shareholders. However, the payout is in cash instead of stocks.

A company announce is $0.10 per share dividend. This means that for every share owned by an investor, he will received 10cents. If the investor owned 10,000 shares, then he would receive a cash dividend of $1000. Since the cash was taken from the company’s capital reverse, the price of the share would reduce to account for the cash withdrawal.

The effect of cash dividend is that there is a reduction in capital reserve of the company and there is no change in the shareholder’s net worth except that a small portion of it is in cash.

Some company introduces a dividend reinvest program where investor can use the dividend to buy additional shares. The effect of such program is the same as stock dividend.

Rights Issue

Rights issue is a way for a public company to raise additional capital from the existing shareholders at a discounted price.

Investor’s Point of View

Assuming a company X has a current market capitalization of $5 billion shares with 100 million shares traded at $50 per share. Assuming that the company announce a 1-for-5 rights issue at a discounted rate of $35 per share; if an investor owned 100,000 shares, this means that the investor has the right to buy 20,000 shares at $35 each.  

If the investor exercised the rights, then his total net worth would be $5,000,000 + $700,000 = $5,700,000. The adjusted share price after rights issue would be $47.5 (5700000/120000).

If the investor bought the original 100,000 share at $50, this means that there is no gain in his investment even after the price was adjusted for rights issue. However, his cost would be $47.5 instead of $50.

The rights issue can be bought and sold in the market price at the difference between $50 and $35 = $15.

Should the investor decided not to exercise the rights, his share would be diluted. Therefore it is wise for the investor to sell the rights issue for $15 to other investors in order to avoid dilution of his holdings.

Company’s point of View

Based on the above example, the company would be raising $700 million dollars from existing shareholder. The total outstanding share would be 120 million shares and total market capitalization would be 5.7 billion. The effective share price would be adjusted to $47.50.

  

Corporate Action and Back Office

As the actual corporate action is done by the custodian, back office need to replicate the computation in order to maintain a reconciled position with the custodian bank. We can buy corporation action data from independent data providers such as FTID.

Such corporate action data will be uploaded to the system and the system would compute the receivables automatically. If there is a discrepancy between the custodian and investment firm, the usual practice is to adopt the estimates from the custodian.

The computations of receivables are usually a close estimates. The actual receipt of cash or dividend may vary slightly due to rounding at various stages.

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Fund Accounting

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Fund accounting is another function of back office. It does not involve in the daily trade execution process. Important functions of fund accounting include accruals, injection or subscription of funds, redemption or withdrawal of fund, corporate action, fund valuation, profit and loss statement and balance sheet.

Accruals

In accounting term accrual means accounting for assets or liabilities for services that are performed in the accounting period. The main accruals are receivables and payable.

Payable

In the context of an investment portfolio, account payable usually includes management fees, tax payable and any expenses that are used but not yet paid.  

The computation of management fees is the most important item in payable  Usually the fund manager will charged 2% per annum of the investment portfolio as management fee. Although fees can be deducted monthly, or quarterly, it is common practice for institutional fund to accrued management fee on a monthly basis.

To compute monthly management fees, the formula is:

Monthly Management Fees (Accrued) = 2% x total investment amount / 12

Accrued management fees will accumulate for 3 months and ready for deduction quarterly.

For mutual funds (or unit trusts) which need to be valued on a daily basis, management fee is accrued daily.

Another major component is custodian fees. The common practice is to accrue the custodian fees monthly regardless of went it is being deducted.

As usual, the computation for fee payable for mutual fund is computed daily.

Receivables

For an investment portfolio, account receivables usually include dividend receivables and interest receivables.

The fund accounting team will start computing dividend receivable when it is announced and credited into dividend receivable. The actual receipt of the dividend will be much later.

Assuming a portfolio owned 500,000 shares of GE stock. The quarterly cash dividend is $0.17 per share. The price of GE at exercise date is $23, the dividend is

Quarterly Cash Dividend Receivables = 500,000 x 0.17 = 85,000

Monthly Cash Dividend Receivables will be = 85,000 / 3

As fixed income interest rate does not vary, interest income is accrued immediately after the fixed income instrument was bought. Interest receivable is usually accrued every month.

Computation of fixed income receivables is:

Assuming the portfolio just bought 20 Year US Treasury Note for USD 10 million with coupon rate of 3%

  

Monthly Interest Receivable = 3% x 10,000,000 / 12

Capital Movement

Fund accounting team also need to track the inflow and outflow of investment fund. For institutional portfolio, capital movement is very minimal. For mutual fund or unit trust, capital movement occurs on a daily basis.

Injection or Subscription of Funds

When there is an additional capital injection for an institutional portfolio, re-balancing is required and additional fund is allocated according to the model portfolio. For fund accounting, there will be a credit in the capital and debit in cash or equity.

Additional consideration is required, such as; monthly accrued management fees will be prorated.

For mutual fund, fund subscription occurs daily. Fund managers may choose to re-balance the portfolio if the subscription is large enough. Most of the time, the fund managers may adopt a policy of re-balancing the portfolio weekly or monthly depending on the size of subscription.

Redemption or withdrawal of Funds

For institutional portfolio, fund withdrawal notice requires the fund managers to sell the equity and prepare the cash for withdrawal.

For mutual fund, daily redemption requires a few days for fund managers to liquidate the assets. As daily redemption occurs in a daily basis, it is usually common for mutual equity fund to maintain a larger portion of cash balances.

Please refer to additional post on Corporate Action, Fund Valuation and Profit and Lost Statement and Balance Sheet.

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Trade Settlement

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After the trade is done, all confirmed and allocated trade will be transmitted to the back office for trade processing. Trade settlement involves trade confirmation, sending of settlement instructions, position reconciliation, actual trade settlement and resolution of failed trade.

Trade Confirmation

The first thing to do for trade processing is trade confirmation. This practice was recommended in order to minimise trading errors from the trading desk and brokers, and at the same time provide check and balances so that rogue traders cannot create bogus trade without the confirmation from brokers.

Trade confirmation is done by matching the trade from the trading desk with the trade confirmation sent from the brokers.

For very small investment firm, this process can be done manually. Usually the trading desk will hand over the trade ticket to the back office. And the back office will compare the trade ticket with the fax confirmation from the brokers. The trade information in the fax confirmation must match the information contain in the trade ticket.

Broker confirmation usually includes institutional (broker) code, transaction reference code, account number, type of order, stock name, SEDOL or ISIN number of the stock, trade date, trade quantity, price, commission, sales tax (if any) and any other miscellaneous charges. Such confirmation is also known as Broker Delivery Instruction (BDI).

For a larger scale investment firm this process is done by the computer system. Some companies use third party services such as Omgeo to provide trade confirmation services.

Sending of Settlement Instruction

When setting up account for your client, the custodian will provide Standard Settlement Instructions (SSI) for each market. You will also open separate account for your client with each respective brokers. The broker will also provide the format of Broker Delivery Instruction (BDI).

We use BDI to perform trade confirmation and we use SSI to send settlement instructions to the custodians. There are industry association that standardize the SSI.

A typical SSI will include custodian code, transaction type (DVP or Delivery free and Receive Free), nature of the SSI (new, replace or cancel previous instructions), security name, quantity, settlement currency, total settlement amount, brokers’ code, settlement agent and settlement agent’s code. All the above information must be accurate or failed trade may occur.

Transaction Type

Delivery Verse Payment (DVP) – this type of instruction allows custodian to delivery shares only when payment is received or vice versa.

Delivery Free (or Receive Free) – this is usually use when no cash payment is required during delivery of shares. This type of instruction is commonly used for securities lending.   

Nature of SSI

You must also indicate if this instruction is a new instruction or if this instruction is to replace or cancel previous instruction. To replace or cancel previous instruction, you need to also supply previous SSI reference.

Total Settlement Amount

The only computation in the SSI is the total settlement amount. 

Total settlement amount for a 'Buy' order = price x quantity + brokers commission + sales tax or withholding tax (if any) + any other charges. 

Total settlement amount for a 'Sell' order = price x quantity - brokers commission - sales tax or withholding tax (if any) - any other charges.

For manual operation, SSI are usually issued via fax or email (in PDF format). Most investment firm uploads or manually enters such instructions via custodian’s website. The larger investment firm uses SWIFT transfer to automate these tasks.

Besides equity transaction custodian bank will also include SSI for Forex instructions.

Position and Cash Reconciliation

We practice daily reconciliation of position to ensure smooth investment operation. It is also used as a measure against failed trade especially those trade with T+2 and T+3 settlement cycle.

While stock holdings are usually accurate, discrepancies may happen in the various cash accounts. It is the responsibility of the back office to reconcile any discrepancies.

Actual Trade Settlement and Failed Trade

Actual trade settlement happens between the custodian, broker and the clearing house of the stock exchange. As multiple preventive measures are implemented to reduce error, it is rare to encounter failed trade.

However, failed trade can still happen, usually when there is insufficient fund from the buyer. Most of the time, the custodian bank will proceed with the trade by topping up the settlement amount and charged the buyer’s portfolio an overdraft fee. Depending on who is at fault, usually the brokers or the investment firm will bear such penalty.

Another common occurrence of failed trade is incorrect settlement amount. This is very common for global account where the settlement amount is computed based on slightly different exchange rate.

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Trading for the China Market

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China stock market, mainly the Shanghai Stock Exchange, has two types of shares. The ‘A’ shares are reserved for domestic investor whereas ‘B’ shares (quote in USD) are open to foreign investors. However, due to market liquidity, most foreign investors prefer to participate in the ‘A’ share market.

Shanghai Stock Exchange allows foreign investors that are qualified under the “Qualified Foreign Institutional Investor (QFII)” program to invest in the ‘A’ share market. Each qualified investor was given a quota for investment. All other foreign investors not in the QFII program can only buy ‘B’ shares. Smaller fund managers that could not qualify for QFII can buy P-Notes (Participatory Notes) from QFII approved market maker. Some QFII approved fund manager who are given little quota may participate in the P-Notes and A share market concurrently.

P-Note or participatory notes is an equity derivative product that allows foreign investor to participate in the restricted local stock market. Currently, India and China market is very active in P-Notes due to its restriction in foreign investment. P-Notes track the underlying share closely and allow entitlement of dividends and other corporate action to the P-Notes holders. The cost of acquiring P-Notes is higher since the market maker will transfer all other charges plus an additional premium.

Most market regulator do not like P-Notes market due to its lack of transparency. To counter the P-Notes market, China has recently increased its quota for the QFII program substantially.

The problem when buying P-Notes from these market makers is that the fund manager may buy P-Notes for a single China stock from different market makers. When it is time to sell, fund managers need to keep track of which P-Notes belong to which market makers.

One solution is to create a standard security for a China stock and create several different derivative securities with different references to differentiate between P-Notes from various market makers.  However, these securities must be able to be grouped together for fund managers to perform asset allocation.

Another method is to buy and sell shares using the same China stock quote and on a separate system, individual shares or P-notes are tracked according to the market makers.

To decide which P-Notes or ‘A’ shares to sell, most fund managers adopt the First-In-First-Out (FIFO) inventory accounting method.

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Trading

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Allocation of Brokers

Every investment firm worked with a number of brokers. The management team and in-house traders will decide how many orders to give to each broker. The management can favors one broker more than another broker. The criteria of allocation depend on the transaction cost, execution speed, trading services and investment information supplied by the brokers.

Most investment clients require the fund management company to be transparent on the brokers’ selection and allocation process. The clients would also prefer the fund management company to put in place a "Trading Best Execution Policy".

Trade Blotters

Traders are market and stocks specific. When they received all the orders from the front office system, the information traders required is the aggregated orders of each stocks.

Although funding problem has to be resolved by the front office system, it is imperative that communications between the traders and fund managers are maintained. Traders could provide market information and inform about the market conditions. Traders could advise fund managers in term of the practicality of the price limit orders.

 

Pre-Trade Analysis and Planning

Looking at the trade blotters in the aggregated form, the traders will formulate their trading strategies and plan for the trading day.

Generation of trade blotters is easy. You need to add all ‘Buy’ orders for each stock and add all ‘Sell’ orders for each stock. 

Before the market opens, traders will start calling brokers and distribute orders among the brokers. It is easier for traders to allocate certain stocks such as Stock A to Broker A and Stock B to Broker B. Some investment firm prefers to split up Stock A between Broker A and Broker B. This will complicates allocate later.

The most commonly used platform and messaging system is Bloomberg.

Trading and Management of Brokers

Although traders generally leave the trade orders to the brokers for best execution; traders will still need to monitor the market condition so that they can advise the broker or change the outstanding order when market conditions changes. The traders will use the opportunity to evaluate various brokers’ ability to fill the orders at the best market price.

Allocation

Once the trade is completed, this is the time where traders start considering allocate the shares to each portfolio according to individual orders for each portfolio. Smaller investment firms require their trader to perform such allocation manually. Bigger investment firms rely on trading systems to perform trade allocation. The most common algorithm used in trade allocation is round robin allocation.

Round Robin Allocation

Assuming we have a BUY order for a particular stock with allocation as shown below:

Portfolio A	1,000,000
Portfolio B	200,000
Portfolio C	50,000
Portfolio D	4,000
	1,254,000

  

There is a total of 1,254,000 shares good-till-cancel market order. The lot size is 1000 shares. Only 50% or 627,000 shares are being executed for the day. The round robin algorithm will allocate 1000 shares for each account and portfolio D’s order will be filled in the 4^thround. This can be a disadvantage to the larger portfolio.

To ensure fairer allocation, a lot size round robin will be allocated for each account in the first round, after which, the algorithm will based on percentage of order filled and the system will favors account with the least percentage of orders filled. The system will ensure that all accounts will reach the same percentage before another round robin allocation is applied.

The following table shows part of the allocation process:

		1st Round	% Allocation	2nd Round	% Allocation	3rd Round	% Allocation	4th Round	% Allocation
Portfolio A	1,000,000	1,000	0.10%	4,000	0.50%	1,000	0.60%	4,000	1.00%
Portfolio B	200,000	1,000	0.50%	-	0.50%	1,000	1.00%	-	1.00%
Portfolio C	50,000	1,000	2.00%	-	2.00%	-	2.00%	-	2.00%
Portfolio D	4,000	1,000	25.00%	-	25.00%	-	25.00%	-	25.00%
	1,254,000

The first round robin, all accounts are given 1000 shares. Subsequently, the system will favor the bigger account until it reached 0.5%. Then, the system will allocate equal shares to portfolio A and Portfolio B. After that, the system will favor portfolio A again until its share reaches 1%. And the system will continue similar way of allocation until all available shares are allocated.

Investment firm can set their policy to raise the marker of 1% to 20%. This means that the system will allocate equal lot size for all portfolios below 20%.

For different brokers with different allotment of a single stock, the system can perform trade allocation for Broker A and use the statistics to continue allocation for Broker B.

Pricing of Traded Stocks

During the course of a trading day, a broker may buy the same stock for different prices depending on the time of the day and market condition. The common practice is to average the price for each trench of stock, so that every portfolio have an equal pricing.

For different brokers transacting for the same stock, each broker will be willing to average the price they transacted however you will have different price for different block of shares transacted by different brokers. This creates additional problem in fair allocation. 

VWAP

VWAP is known as Volume Weight Average Pricing. It is a calculated price use primarily by traders and brokers to measure the execution of trade. It is a measurement preferred because VWAP ignore temporary spike in prices which was transacted on very low volume.

The formula for VWAP =

Where P is price of each trade t, Q is the quantity of each trade t

VWAP for a stock involves adding all the transaction value in the exchange. Only the exchange and larger trading platform such as Bloomberg can compute VWAP since it involves computing all the trade transacted for the day.

If the transacted price of a 'Buy' order is higher than VWAP; this means that the broker who executed this trade is unable to execute at market price and vice versa.

We can also compute VWAP internally by computing the VWAP based on the all the transaction for a stock. Then we can measure the local VWAP against market VWAP.

VWAP is used by traders to measure performance of each broker. Clients in turn use VWAP to measure the performance of the trading desk of the investment firm.

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