Allocation

Allocation is the part of a submitted order that an investor actually receives when, in a placement, there are more would-be buyers of a security than there are securities in the offering. The investor bids for an amount or a number of shares, the organisers scale the order back according to a rule announced in advance, the securities are credited to the account in the reduced quantity, and the unused funds are released.

How the share is determined

Together with the arranger, whose role is described under underwriter, the issuer builds the order book. If total demand exceeds supply, every order has to be scaled back, and the fill rate is the ratio of the number of securities actually credited to the number ordered, conventionally expressed as a percentage. The scaling rule is set before bookbuilding closes: pro rata to order size, with priority for institutional investors, with the same minimum lot for retail investors, or a mix of these. Price selection works separately: an order placed below the final offer price is not filled at all, which is a zero allocation rather than a small one. The details of the procedure for a first-time listing are covered in IPO allocation, and for the sale of new shares by a company that is already listed in allocation in a placement and secondary share issue.

What the data show after the placement

Allocation records only the size of the block received and the price at which it was obtained; everything that happens afterwards is shaped by the exchange. For example, a security from the exchange's catalogue shows that its current price and turnover take on a life of their own and never refer back to the fill rate of the order.

Where the term is misunderstood

The main confusion is with the distribution of assets across classes, which in English-language texts is also called allocation but concerns portfolio structure and is covered under diversification. These are different things: here we are talking about the technical scaling back of an order in a single placement.

The second is a situation in which the term is meaningless. If demand is below the size of the offering, there is nothing to scale back, orders are filled in full, and there is no reason to talk about allocation; with a closed circle of buyers, as in a private placement, the distribution is determined by agreement rather than by the order book.

The third is the expectation that the block received will be easy to sell. The fill rate says nothing about how actively the security will trade, which is a matter of liquidity, or about the period during which sale is prohibited, if one is set, which is covered under lock-up.