Aggregation and allocation of orders - COBS Provision

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Section 11.3.7, COBS Rules

COBS Rules

Aggregation and allocation of orders

11.3.7 A firm is not permitted to carry out a client order or a transaction for own account in aggregation with another client order unless the following conditions are met:

(1) it must be unlikely that the aggregation of orders and transactions will work overall to the disadvantage of any client whose order is to be aggregated;
(2) it must be disclosed to each client whose order is to be aggregated that the effect of aggregation may work to its disadvantage in relation to a particular order;
(3) an order allocation policy must be established and effectively implemented, providing in sufficiently precise terms for the fair allocation of aggregated orders and transactions, including how the volume and price of orders determines allocations and the treatment of partial executions.

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An aggregated order consists of a group of orders from different clients to buy or sell a specific security which are bunched together by a broker and handled as a block. That block might itself be "worked" or executed in smaller clips on different exchanges and venues in shapes and sizes that do not correspond with the shapes and sizes of the original order. The clients are each given a single blended price of the execution of those orders on the exchange.

Example

Broker receives the following client orders at market, almost simulataneously, but infinitessimaly in this order, in Vodafome plc, a mobile foam company:

  • (a) Client A for 100 securities;
  • (b) Client B for 80 Securities;
  • (c) Client C for 20 securities,

For the less mathematically inclined, that makes a total of 200 securities.

The Broker goes to the various venues available to it can see the following offers: (i) 45 Securities on Exchange X at 99; (ii) 120securities on MTF Y at 100, and (c) 45 Securities at 101 in its internal order book.

Broker hits all these offers and returns to camp triumphantly with 200 Vodafome securities, and allocates them to the clients at 100 each, being the blended price.

Advantage and disadvantage

The question arises as to whether anyone has been disadvantaged here. On one hand, Client A might say "look: I was first: You could have filled my order on Exchange Y and from MTF Y (ok - it would have been a partial fill - but still) and obtained me a blended price of 99.55".

Now arguably client Y's order couldn't have been filled at all because the shapes don't fit. And through time, on average, client will benefit as frequently as it will lose.

Conduct of Business

This is an article about the FCA’s conduct of business rules, known by its chapter in the FCA Sourcebook, COBS, which implement, among other things, MiFID (directive 2004/39/EC (EUR Lex) and implementing directive 2006/73/EC (EUR Lex)).