Call Auction
What Is a Call Auction?
A call auction, or call market, is where market participants place orders to buy or sell at certain bid or offered (ask) prices, which are then batched together and matched at foreordained time spans. Orders collected during a call auction are completely executed at the price that forms the best overall match. Call auction rules might shift by exchange.
Understanding Call Auctions
In the securities market, a call auction replaces the method of continuously matching orders. Buyers set a maximum price at which they will buy the shares and sellers set a base price at which they will sell the shares.
Most major stock markets open and close trading with a call auction, while a continuous market for trading works the remainder of the day. Call auctions batch orders together to make large multilateral trades in which buyers and sellers show up at a single price.
In a traditional call auction, an auctioneer "calls" out to request buy and sell orders for a security and afterward bunches them for execution at determined times during a trading day. The auctioneer's job is to best match the supply and demand of a security to show up at a clearing price.
All market orders for purchase and sale will be executed at that clearing price. The auctioneer will execute limit orders to buy at the clearing price or below and limit orders to sell at the clearing price or above.
Call markets are helpful for illiquid securities or assets.
Benefits of a Call Auction
An electronic call auction clears buy and sell orders for a given asset at foreordained points in time. By bunching numerous transactions together, a call market increments liquidity and can essentially diminish transaction costs for participants. As an alternative market structure, call auctions impact order flow and dealing with choices, price discovery, and market transparency.
Orders batched into call auctions are "priced" orders, meaning all orders are limit orders; there are no market orders included. On the other hand, in continuous trading, limit orders possibly trade at their limit prices when the market prices trigger.
In the call auction, in any case, prices can improve for everybody. For example, a buy order in a call might list $20.50 as the maximum price to pay however really execute at $20.40. A seller, in the mean time, may have had the least price limit of $20.30, yet receive $20.40 in the call auction.
Call auctions are more liquid than continuous trading markets, while continuous trading markets give participants greater flexibility.
Call Auctions versus Continuous Trading
In a continuous trading market, traders can trade whenever when the market is open. Buyers and sellers continuously place their orders and are matched on a continuous basis. Most markets that we see today, including the stock exchanges, derivatives exchanges, and the forex market, are continuous trading markets.
In a call auction, trades are rather executed by a order-driven system. The fact that will boost [volume](/volume causes them to use single price auctions that match the orders of buyers and sellers and afterward a single trading price picked).
The two types of markets enjoy their own benefits and disadvantages. The greatest advantage of a call auction is that it gives high liquidity as all traders inspired by a security need to make their trades simultaneously and place. Continuous markets, in the mean time, give traders the flexibility to make their trades at whatever point they need.
Illustration of a Call Auction
A call auction is initiated in an illiquid stock to be traded at 1:00 p.m. EST. The stock's specialist assembles the accompanying buy and sell orders in advance:
- Buy 50 shares at $885
- Buy 75 shares at $875
- Buy 100 shares at $870
- Sell 100 shares at $870
- Sell 75 shares at $880
- Sell 50 shares at $890
The best match is chosen at $870 per share. This is the call price that is executed for all orders that have been batched together at that moment.
Highlights
- As opposed to trading continuously over the course of the day, a call auction puts small orders together to cause greater trades in which participants to show up at one price.
- In a call auction, bids and offers are totaled and matched up with each other and afterward executed at foreordained stretches at a best-matched price.
- An illustration of a call auction would be the opening or closing rotation of a stock on an exchange by a specialist.
- By assembling many orders in batches that then trade at specific times, a call auction keeps liquidity flowing and can cut transaction costs for traders.
