I am confused about pro rata allocations for block trades or just pro rata allocations in general - I know there have been posts but cannot quickly find an answer.
To me, pro rata allocation means that you allocate in proportion, to…indicated order size or indicated interest, or if that is all the same, you would just allocate equally among all suitable clients. For example, if 3 clients all ordered 300 shares but only 300 shares could be purchased, you would allocate each client 100 shares. This would be done, REGARDLESS of account size (i.e. if client A had a $10B account and client B had a $10 account, it doesn’t matter - you cannot preferential treatment to larger clients).
Now lets say that you allocate pro rata still, but the clients have differing indicated interests (or order sizes), say client A orders 300 shares, client B orders 200 shares, client C orders 100 shares. Only 100 shares could be purchased. I would assume that you would give A 50% = 50 shares, B 33% or 33 shares, etc - is this correct?
Now looking at the actual execution of the orders: I would imagine that a dealer would not be able to just execute all 3 of the client’s orders simultaneously…if not, then the order in which they are executed could negatively affect different clients (i.e. the ask price could get bid up with successive purchases) - how do you execute the orders so as to treat all clients fairly in this scenario?
One more thing, if 2 clients each put in an order for 200 shares, and only 100 shares are able to be purchased, but client A has a different level of service than B (i.e. he pays like $50K a year more for premium services, relative to B) - would A be able to get more than 50% of the 100 shares, because of the different level of service?
I’d say that you’d execute an order for 100 shares, then divvy them up internally. (Note: I’ve never worked on a trading desk, so I’m just spitballing here. But it seems reasonable. Perhaps former trader can pop in with an expert reply.)
It probably depends on the explicit description of the different level of service. Absent any explicit language saying that he gets a bigger share, I’d say, “No.”
