Fill rates

What Are Fill Rates?

Fill rates represent the percentage of an investment order that is successfully executed by a broker-dealer. In the context of market microstructure, a fill rate indicates how much of a requested trade quantity was completed at the specified or prevailing market conditions. For example, if an investor places an order to buy 1,000 shares of a stock and only 900 shares are acquired, the fill rate for that order is 90%. Understanding fill rates is crucial for investors as they reflect the efficiency and completeness of order execution, impacting overall transaction costs and investment outcomes.

History and Origin

The concept of fill rates, while not explicitly formalized with a specific origin date, is intrinsically linked to the evolution of brokerage and securities trading. As financial markets developed from open outcry pits to electronic exchanges, the efficiency of executing customer orders became a paramount concern. The drive for efficient trade execution led to the establishment of regulatory frameworks. In the United States, the National Association of Securities Dealers (NASD), a predecessor to the Financial Industry Regulatory Authority (FINRA), established a "best execution" rule in 1968, requiring brokers to seek the most favorable terms for customer orders. This obligation inherently considers a broker's ability to achieve high fill rates alongside favorable pricing.⁹ The ongoing evolution of this duty is reflected in rules such as FINRA Rule 5310, which continues to govern best execution for broker-dealers.⁸ Similarly, in Europe, the Markets in Financial Instruments Directive II (MiFID II) introduced comprehensive best execution requirements, emphasizing factors like speed and likelihood of execution, which directly relate to fill rates.⁷

Key Takeaways

• Fill rates measure the proportion of a trade order that is successfully completed.
• A high fill rate generally indicates efficient order execution, particularly for market orders.
• For limit orders, the fill rate can depend on the specified price and available liquidity.
• Fill rates are a critical component when assessing a broker-dealer's overall best execution performance.
• Factors such as market depth, volatility, and order size can influence fill rates.

Formula and Calculation

The formula for calculating a fill rate is straightforward:

Variables:

• Number of Shares Filled: The actual quantity of shares (or other financial instruments) that were successfully bought or sold.
• Total Shares Ordered: The total quantity of shares (or other financial instruments) initially requested in the trade order.

For instance, if an investor places an order for 500 shares and 450 shares are executed, the fill rate is calculated as:
(\left( \frac{450}{500} \right) \times 100% = 90%). This calculation provides a clear percentage of how much of the desired trade was completed.

Interpreting the Fill Rate

Interpreting fill rates involves understanding the type of order placed and the prevailing market conditions. For a market order, where the investor prioritizes immediate execution over a specific price, a high fill rate (ideally 100%) is usually expected. A low fill rate for a market order might suggest issues with liquidity in the market or the broker-dealer's ability to access diverse trading venues.

Conversely, for a limit order, where an investor specifies a maximum buy price or a minimum sell price, a lower fill rate is not necessarily a negative indicator. It simply means that the market did not reach the desired price level for the entire quantity, or that there wasn't enough volume at that specific price. In such cases, the investor's priority is price control, and the fill rate reflects the market's willingness to meet that price.

Hypothetical Example

Consider an investor, Sarah, who wants to purchase shares of Company ABC.

1. Scenario 1: Market Order
   Sarah places a market order to buy 200 shares of Company ABC. Due to high trading volume and ample liquidity, her broker executes the entire order at the prevailing market price.

   • Shares Ordered: 200
   • Shares Filled: 200
   • Fill Rate: (\left( \frac{200}{200} \right) \times 100% = 100%)
     In this case, the 100% fill rate indicates successful and complete execution of her market order.

2. Scenario 2: Limit Order
   Sarah places a limit order to buy 200 shares of Company ABC at a maximum price of \$50.00 per share. The stock is currently trading at \$50.10. Over the next hour, the price briefly dips to \$50.00, and her broker manages to acquire 150 shares before the price rises again.

   • Shares Ordered: 200
   • Shares Filled: 150
   • Fill Rate: (\left( \frac{150}{200} \right) \times 100% = 75%)
     Here, the 75% fill rate reflects that only a portion of her order could be executed at her specified price limit, which is a common outcome for limit orders in fluctuating markets.

Practical Applications

Fill rates are a fundamental metric in several areas of finance:

• Brokerage Performance Evaluation: Investors often consider fill rates, alongside other factors like price improvement and speed of execution, when choosing a broker-dealer. Brokers that consistently achieve high fill rates for market orders demonstrate strong access to liquidity and efficient trading systems.
• Algorithmic Trading: In algorithmic trading strategies, fill rates are closely monitored to assess the effectiveness of order-routing logic and execution algorithms. Algorithms may be designed to optimize fill rates, sometimes at the expense of slight price deviations, depending on the strategy's objectives.
• Regulatory Compliance: Regulatory bodies like FINRA in the U.S. and the European Securities and Markets Authority (ESMA) in the EU mandate that broker-dealers adhere to best execution standards. While not the sole determinant, fill rate is a component considered in a broker-dealer's regulatory compliance with these obligations.⁶ The U.S. Securities and Exchange Commission (SEC) has also proposed new rules under "Regulation Best Execution" to codify a federal standard for brokers to achieve the "most favorable price" for customers, which inherently links to the likelihood and completeness of execution.⁴, ⁵
• Market Analysis: Analysts may examine aggregate fill rates across different securities or capital markets to gauge overall market efficiency and liquidity during specific periods or events.

Limitations and Criticisms

While a high fill rate is often desirable, especially for market orders, it is not the only measure of quality order execution. A key criticism of focusing solely on fill rates is that a broker could achieve a 100% fill rate by executing an order at a suboptimal price. For instance, if a broker fills a large market order by crossing the bid-ask spread significantly, the investor might receive a complete fill but at a less favorable price than could have been obtained.

Therefore, fill rates must be evaluated in conjunction with other best execution factors, such as price improvement, speed of execution, and the overall transaction costs. Regulations, such as those from the SEC and ESMA, emphasize a holistic approach to best execution, acknowledging that achieving the best possible result for the client involves balancing multiple criteria.², ³ Over-reliance on fill rates without considering the achieved price can lead to hidden costs and negatively impact an investor's investment strategy and overall portfolio management returns.

Fill Rates vs. Best Execution

While closely related, fill rates and best execution are distinct concepts in finance. Fill rate specifically quantifies the percentage of a given order that has been successfully completed. It is a numerical measure of the completeness of an order.

Best execution, on the other hand, is a broader regulatory and ethical obligation imposed on broker-dealers. It requires brokers to use reasonable diligence to ascertain the best market for a security and to buy or sell in that market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.¹ This obligation encompasses various factors, including the opportunity for price improvement, speed of execution, the likelihood of execution (where fill rates play a role), the size of the order, and overall transaction costs. Therefore, a high fill rate is a component of best execution, but it does not, by itself, guarantee that best execution has been achieved. A broker could achieve a 100% fill rate, but if the price was worse than what was reasonably available elsewhere, it might still violate its best execution duty.

FAQs

What does a 100% fill rate mean?

A 100% fill rate means that the entire quantity of the trade order placed was successfully executed. For example, if you ordered 500 shares, all 500 shares were bought or sold. This is generally desirable for market orders.

Why might an order not be fully filled?

An order might not be fully filled for several reasons, particularly if it's a limit order. Insufficient liquidity at the desired price, rapid price movements, or the order size being too large for the available supply/demand at that moment can all lead to partial fills.

Are higher fill rates always better?

Not necessarily. While a high fill rate is often good, especially for immediate order execution, it must be considered alongside the executed price. A broker might achieve a 100% fill rate at a less favorable price, which would not constitute best execution.