Locked Market

What Is a Locked Market?

A locked market alludes to a situation where the bid and ask price for a security is indistinguishable. This is an abnormal market condition — the bid price will constantly be below the ask price in normal trading conditions. Locked markets happen due to the complexity of modern financial markets.

How Locked Markets Work

Today, investors who wish to buy or sell a company's shares are collaborating with a large number of underlying markets and computer systems, which are all collected together to introduce the single bid-ask spread that is displayed to the investor.

For instance, at some random time, the best available bid and ask prices for a security may be obtained from two unique marketplaces. In theory, the data from various marketplaces is combined to give investors a single unified perspective on the best available price.

In practice, nonetheless, the different computer systems associated with this cycle are subject to minor differences in latency and processing speed, which brings about timing differences in the appearance of quote information.

Thus, it's workable for the best available bid or ask price demonstrated to be obsolete, leading to a locked market in which the bid and ask price are indistinguishable. Hypothetically, this situation wouldn't arise since any match between the bid or ask price ought to bring about the transaction being referred to being cleared. Be that as it may, in the event that either of the prices are obsolete, the transaction being referred to wouldn't have the option to clear, making those prices continue for a brief time — a sort of financial illusion.

Locked Market versus Crossed Market

Locked markets are connected with crossed markets, which happen when the bid price is higher than the ask price. Crossed markets are likewise unusual conditions that arise due to electronic and computerized trading.

Crossed markets will generally arise either during very fast trading conditions in unpredictable markets or very sluggish movement in illiquid markets. Fast trading might happen when market participants are selling in a panic.

Illustration of a Locked Market

Michael is a retail investor wishing to purchase shares in Apple (AAPL). While endeavoring to enter the order, Michael sees that the company has a bid-ask spread of zero, with both the bid and the ask listed as $108 per share.

As an accomplished investor, Michael sees that this is an unusual situation. All things considered, in the event that the buyers and sellers have agreed on a price, how could they not have proactively completed their transactions at $108 per share?

After researching this inquiry, Michael determines it's a locked market for this security, which has arisen due to timing differences in the spread of data between the different stock market systems engaged with the price quotation. In down to earth terms, the locked market is a side effect of wrong data — one which generally scatters decently fast.

Features

• Locked markets are a rare occurrence and generally don't last for a really long time.
• It arises due to timing differences in the appearance of price-quotation data from various stock market systems.
• A locked market is a situation where the bid and ask prices for a security are briefly something very similar.