Pro rata allocation

From MarketsWiki
Jump to: navigation, search
FTSE Russell banner 2016.gif

Pro Rata allocation is a method of allocating fills across many orders. It can be used to allocate a bunched order, by a Commodity Trading Advisor to allocate to multiple accounts across multiple carrying firms, or by a trade matching engine to allocate fills to resting orders.

A pro rata allocation method assigns the fills based on percentages of the total.

Pro Rata Allocation Example

Consider an order book consisting of three separate orders to buy at the same price, the first order for 10 contracts, the second order for 20 contracts and the third order for 70 contracts for a total of 100 contracts. Suppose a sell order is entered for 30 contracts. Under a pro rata system, it may be be allocated as three contracts to the 10 lot order, six contracts to the 20 lot order and 21 contracts to the 70 lot order. When used by an electronic matching engine, it is also referred to a pro rata algorithm.

One criticism of a pro rata method is that it may encourage a market participants to enter an orders with quantities greater than they intend to trade, in order to receive a greater allocation.[1]


References

  1. Is Pro Rata an Accident Waiting to Happen?. Advantage Futures.