Quick definition Pro-rata allocation gives execution proportional to order size at the same price level. A 100,000 share order at 100.00 receives twice the execution of a 50,000 share order at 100.00. What it is When a market order arrives and multiple resting orders exist at the same price level, pro-rata divides the execution based on size. Example: at 100.00, Order A (100,000 shares) and Order B (50,000 shares). A market order for 75,000 shares arrives. Pro-rata: Order A fills 50,000 (100k/(100k+50k) * 75k). Order B fills 25,000 (50k/(100k+50k) * 75k). Why it matters Pro-rata is used by some exchanges (CBOE, some futures exchanges) instead of time priority. Pro-rata encourages participation and large orders. Time priority encourages early submission. Pro-rata encourages large orders. Different exchanges use different matching rules to attract different trader types. Pro-rata versus time priority Time priority gives all execution to the oldest order. Pro-rata divides execution based on size. Time priority traders value queue position. Pro-rata traders value size advantage. Practical example A CBOE options exchange uses pro-rata allocation. At a given strike price, Order A (1,000 contracts) and Order B (2,000 contracts) are resting. A market order for 900 contracts arrives. Pro-rata allocation fills: - Order A: 300 contracts (1,000 / 3,000 * 900) - Order B: 600 contracts (2,000 / 3,000 * 900) If the exchange used time priority, all 900 would go to whichever order arrived first. Order size and queue position Pro-rata reduces the value of queue position (arrival time is less important). This can reduce incentives for high-frequency order placement and cancellation, which some see as positive for market quality. Variations Some exchanges use modified pro-rata, which gives queue priority to a portion of the order and pro-rata to the remainder. See also - Time Priority (FIFO) - Price Priority - Queue Discipline - CBOE Matching
