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APS was supposed to make things easier

03/16/2010

Permalink 03:36:46 pm, by Dana Comolli Email , 491 words   English (US)
Categories: Reconciliation, Accounting, Futures Trading

APS was supposed to make things easier

When the Clearing Corporation developed the Average Price System (APS) approach to handling mixed fills, its purpose was to make it easier for traders to allocate their trades across multiple accounts. Unfortunately, policy changes at some FCMs have changed all that.

Background

The Clearing Corporation developed the APS system in June of 1992 as a way of making the execution process more efficient. Then in 1994, they introduced APS “Plus Five,” creating a consistent, industry-wide standard for calculating and processing average price trades for clearing and bookkeeping systems.

This method involves rounding the weighted average fill price to the nearest tradable price (up on a buy and down on a sell.)  Each account is filled at that rounded price and then given an “APS Adjustment” in the form of a cash credit to make up for the slightly worse than average price each account receives.

This has been the norm for APSed orders until late 2009 when some brokers started clearing the trades at the numerical average price and dispensing with the APS adjustment. This provides the clearing firm one primary benefit, no need to provide cash adjustments.

The issue for Traders

The result of this change is a situation that rivals the complexity the APS system was designed to solve.

Where once every account got filled at the same price, now accounts get filled based on where they clear.  If a block trade includes accounts that clear at brokers that pick up the trade at the rounded (APS) price and accounts that clear at brokers that pick up the trade at the numerical average price, accounts get different fill prices even though the trade was APSed.

When reporting give-up’s and trade recaps, this difference based on where an account clears must be taken into account. Reconciliation is equally impacted since these changes affect trade confirmations, positions, and cash balances.  OTE and realized gains for two accounts that trade identically are now a function of where they clear.

How TheBooks can Help

TheBooks includes the ability to indicate that a clearing broker either does or does not pick up APS trades at the rounded price with APS adjustments. When block trades are APSed, those accounts that clear at FCMs that pick up the rounded price get filled at the rounded price and are given a cash adjustments, those accounts that clear at FCMs that pick up the trade at the numerical average get filled at that price without cash adjustments.

Counter-party notifications, allocation files, and other trade-related notifications automatically incorporate the appropriate price formats. Reconciliation understands these changes and the precision used by each broker for numerical average prices can be configured to work around any variances that exist in FCM back office systems.

Of course, since TheBooks incorporates multiple price allocation methods for fairly and consistently allocating multiple fill prices accross the accounts that make up a block trade, perhaps the easiest approach is to dispense with the APSing of trades altogether.

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