Price-time allocation model

The Price-Time Allocation Model, also known as Price-Time Priority or First In, First Out (FIFO), is a method used in financial markets to determine the order in which trades are executed. This model is widely employed in electronic trading systems, particularly in equity and derivatives markets.
== Overview ==
The Price-Time Allocation Model prioritizes orders based on two primary factors:
* Price: The best price (highest bid or lowest offer) takes precedence.
* Time: When multiple orders exist at the same price, the order placed first is executed first.
This allocation method is designed to promote fairness and transparency in financial markets by rewarding traders who place their orders earlier at a given price level.
== Mechanics ==
In the Price-Time model, the order book is organized as follows:
All orders are first ranked by price, with the best prices (highest bids and lowest offers) at the top of the book.
Within each price level, orders are then ranked chronologically based on their timestamp.
When a new order enters the market, it is matched against existing orders following this price-time hierarchy.
=== Example ===
Consider the following simplified order book for a stock:
 Example
Buy Orders 	Price 	Sell Orders
100 @ 10:01	$50.00	150 @ 10:03
200 @ 10:02	$50.00		100 @ 10:04
300 @ 10:00	$49.99	200 @ 10:02
If a new market order to buy 200 shares arrives, it would be executed as follows:
* 150 shares against the first sell order at $50.00 (placed at 10:03)
* 50 shares against the second sell order at $50.00 (placed at 10:04)
== Advantages ==
* Fairness: Rewards traders who place orders earlier, encouraging price discovery.
* Transparency: Provides a clear and easily understood method for order execution.
* Efficiency: Facilitates rapid matching of orders in high-frequency trading environments.
== Disadvantages ==
*Queue Position: Traders may lose priority if they need to modify their orders.
*Large Order Challenges: It can be difficult for large orders to be filled completely, as they must wait in line behind earlier, smaller orders.
== Alternatives ==
While the Price-Time model is widely used, some markets employ alternative allocation methods, such as:
* Pro-Rata Allocation: Orders at the same price level are filled proportionally based on their size.
* Mixed Models: Some exchanges use hybrid approaches that combine elements of Price-Time and Pro-Rata allocation.
* Application in Financial Markets
The Price-Time Allocation Model is used by many major exchanges and electronic communication networks (ECNs) worldwide. It is particularly prevalent in equity markets and certain derivatives markets.
Some notable exchanges using this model include:
* NASDAQ
* New York Stock Exchange (NYSE)
* London Stock Exchange (LSE)
* Many options and futures exchanges
== Regulatory Considerations ==
Regulators often view the Price-Time model favorably due to its inherent fairness and transparency. However, the model's interaction with high-frequency trading strategies has led to ongoing discussions about market structure and potential reforms.
== References ==
Category:Financial Markets
Category:Options Exchanges
Category:Futures Exchanges
Category:Equities Exchanges
Category:Market Structure
Category:Trading Strategies
Category:Electronic Trading
Category:Market Microstructure
Category:Liquidity Provision