September 8, 2011 | In: General
What Is the Average Fill Price?
In my previous article clarifying how stocks prices are set, I have mentioned the term average fill price. So, what is the average fill price and how is it calculated?
When I first started trading, I used to only trade very liquid stocks such as BAC and C, and at very small quantities, so, when I used to submit an order, the order used to take a few seconds to get filled, and I used to always see something like the following (in the details of the order):
500 shares of BAC: Fill Price $15
Average Fill Price: $15
I thought that the average fill price used to be always equal to the price of the stock in the market, which, as I later discovered, is wrong.
At first, I didn’t care about the term a lot, but I started paying more attention when I began trading small cap stocks such as BIOS. I remember that BIOS was trading at around $4.30 a bit more than a year ago, when I submitted an order of 1,000 shares. Here’s what I saw (that order, as I recall, took a few minutes to get filled):
400 shares of BIOS: fill price $4.30
300 shares of BIOS: fill price $4.35
200 shares of BIOS: fill price $4.37
100 shares of BIOS: fill price $4.40
Average fill price: $4.34
I then understood, because the stock was not that liquid, and my order was relatively large, the order was looking for stocks to sell at a higher price, until it was completely filled. So, it started with 400 shares at $4.30 (which was the price that I wanted to buy at), and then it couldn’t find any shares at that price, and the shares to be sold with the closet price were 300 shares at $4.35. My order consisted of several transactions, and the average price/share at which my order was filled is called the average fill price. So, in my case, the average fill price was:
Average fill price = (400 x $4.30 + 300 x $4.35 + 200 x $4.37 + 100 x $4.40)/1000 = $4.34
Here’s the formula:
Average fill price = Σ(number of shares per transaction x fill price per transaction) / total number of shares per order
The average fill price is the price at which you bought (or sold) the stock. So, in case of a buy order, if the stock price goes above your average fill price, you will make money, otherwise, you will lose money (Note that I’m not taking commissions into consideration).
Note that it is not always the case to see the average fill price higher than the price of the original transaction in the order. In many cases, when the stock is experiencing a huge drop, the fill price of each subsequent transaction in the order will be lower than the price of the first transaction, and thus the average fill price will also be lower than the price of the original transaction.
Another note is that even if your order consists of several transactions, you will only be charged one transaction fee (for example, if your broker charges $10 a trade, and your order consisted of 5 transactions, you will only be charged for $10).
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