That's exactly what pro rata does.
One work-around might be to add rules to the exchange forbidding the placing of multiple bids by the same entity at the same price, and then allocating randomly.
This is also reminding me of the Talmud's descriptions of how to pay off debtors when there isn't enough money to go around: http://mindyourdecisions.com/blog/2008/06/10/how-game-theory... Such a system could work for exchanges too, although it still encourages over-bidding.
Surely also over-bidding has its own risk/reward curve so it would be reasonable to allocate pro-rata and let people work out how much to over-allocate.
* And realised what the implications were.
Elsewhere in this thread (http://news.ycombinator.com/item?id=3856015) I argue against treating orders differently based on the "entity" that placed them.
In general, we want traders to spend their time thinking about asset prices and risk, not market structure and game theory. The price-time priority system is a very simple one that rewards traders for deciding what they want and then announcing it right away. All the modifications that have been proposed in this thread encourage traders to play games, second-guess one another, or otherwise work around the system.
There are definitely tradeoffs, but personally I think it's better to use the cleaner system and accept the latency arms race than to add a layer of artificial incentives -- and for what it's worth, it appears that nearly every major electronic market has come to the same conclusion.
Finally, thanks for the link to the Talmud article: it was a very cool application of game theory to history. (Of course, I don't see any indication in the article that the Talmudic system would be an improvement over pro rata.)
So I don't think the current solution is necessarily wrong; just annoying we can't get all the benefits and also avoid the arms race.
No problem, I very much like the Talmud article and how simple the explanation works out to being.