can someone explain what would it mean to allocate trade on pro rata basis and what would it mean to allocate on a ad hoc basis?
pro rata basis is based on size and interest factors, for example, take an IPO of Facebook, the broker would first obtain interest from those willing to invest in social media, once that is established, the firm would apply there allocation procedures based on a specific formula, usually with larger orders executed first ad hoc is at their discretion following written procedures **correct me if i am wrong
wouldn’t larger orders executed first be unfair cos on page 116 schweser there is this case study where the largest account size was allocated shares first and that was considered violation
I don’t have the page in front of me, but I believe the confusion is between “account size = existing account” and “order size = number of shares in an order.” If you constantly give preference based on “account size” that is a violation, but if the firms trade allocation policies in an oversubscribed offer is based on order size, that is not a violation. Do you follow?
yes i do but tel me what will be pro rata basis of allocation in case where many accounts already exist and you have to allocate a block tarde say 50000 shares u have brought how would u allocate them?? in these account on pro rata basis???
Based upon the underlying size of those accounts along with suitability. Larger accounts will receive a larger portion of that block than smaller accounts due to a specific fraction/forumla for valuing the amount to each.