quick (and stupid) question: when allocating IPOs on a pro rata basis, I thought they mean allocating each client a % according to order size (relative to the sum of all orders from all clients) but in the 2nd exam, vol 1, schweser, they say something like “pro rata according to portfolio size, suitability…” what do they mean by that “pro rata”? thx
“pro rata” basically means according to the size. [Anyone study Latin out there? Doe is mean literally (by the rate???)] So if it a portfolio is 10% of all the total AUM and they are allocating pro rata according to portfolio size then it would be 10%. I think in the 2nd exam, vol 1 they are also pointing out that you can’t blindly do it pro rata as a formula and you need to also consider suitability, however pro rata allocation amongst all accounts something is suitable is acceptable IMO. Hope that helps.
so pro rata is in terms of PORTFOLIO size, not ORDER size? thx
from general practice I beleive pro rata means allocation in IPO is proportionate to order size.
acc to port size will be wrong… bec you are then favouring your largest clients. order size seems more appropriate.
I think it means that some firms allocate based on pro-rata of portfolio size, then if the portfolio is 10% of AUM of all the portfolios for which it was deemed suitable then that portfolio would be given 10% of that particular order. It’s kind of in terms of both order size and portfolio size I think. If you want some hot new IPO, the IPO is suitable for all portfolios in the firm, and your big firm put in a total order for 200 million but you are the PM for a portfolio representing 10% of AUM. I firm is only allocated 100 million in an oversubscribed by 2X issue, then you would be given your pro-rata share or 10% or 10 million. Hopefully that makes it more clear.
ORDER SIZE, CFAI SAMPLE EXAM SAY THIS.
OK, after thinking about it further, I would tend to agree with Mapley. Firm would just scale back order pro-rata based on order size. So if you put in for 20 million in my above example and firm only got 100 overall, then you would get pro-rata or 20/200 or 10% or 10 million based on your order size.
same thing got my attention too… there was a violation there anyway I think but I believe its order size, it doesnt make sense for account size
Think about it this way. If you are a PM and you are buying a stock for your clients, every account does not get the same amount of shares. If you have a client with $1 million and a client with $100,000 there order sizes would be different. So portfolio size translates to order size. When you build the order: client A would order 10,000 shares client B would order 1,000 shares You would send in a block for 11,000 shares to the trading desk. If you only execute 8,000 shares each account is then allocated the proper proportion of the original order (pro rata). Client A gets 7,273 Client B gets 727 Which translates to each account getting the same percentage of stock. So it is correct that the pro rata is based on order size, but in general, order size is based on portfolio size- the clients each get the same % of stock. It translates, 100% positive…NO VIOLATION!!!
thanks for the answers
i got this wrong on the mock, probably because I read this thread and mis-understood it 
The mock says, it needs to be as per the order size.
yeah but whatif client A and B both ask the PM to buy 10,000 shares?
discretion would be lost and it would have to be removed from the composite to conform with GIPS.