Price Continuity
What Is Price Continuity?
Price continuity is a characteristic of a liquid market wherein the bid-ask spread, or difference between offer prices from purchasers and mentioned prices from venders, is relatively small. Price continuity mirrors a liquid market, for which there are numerous purchasers and merchants for a given security.
Price continuity ought not be mistaken for low volatility. In any case, there is a relationship between the two. Stocks with small average true ranges, a measure of volatility frequently applied to individual securities, may have more price continuity. The equivalent is true of exchange-traded funds representing an index.
As a general rule, nonetheless, most exchanges try not to limit volatility, while advancing price continuity. This will in general advance efficient price discovery.
How Price Continuity Works
Price continuity allows markets to trade rapidly and efficiently, by quickly matching purchasers with merchants. Without price continuity, the overall amount of trading volume will in general fall, thus can the open interest of options and futures markets. Likewise, a lack of price continuity here and there halts market trading.
For instance, say a genuinely liquid security that trades in excess of 500,000 shares has a genuinely narrow bid-ask spread. This spread broadens, nonetheless, just as the average true reach extends when the company reports earnings that are either exceptionally strong or weak relative to expectations, as this new data is processed by market participants. In any case, price continuity proceeds in the event that a large number of traders step in to make up for the shortfall with additional bids and asks.
Running against the norm, systemic occasions break down price continuity. For instance, say a government in Europe defaults on its sovereign debt, clearing out substantial value for specific banks and bracing down on the overall volume of global equity and bond trading. These types of occasions influence price continuity substantially. The gulf among bids and asks generally broadens as a potential crisis unfurls.
Managing Price Continuity
A research recommends managing price continuity to a degree advances market proficiency. In many markets, exchanges set up trading rules for this very reason. For instance, exchanges some of the time limit the daily absolute price change for a specific stock. Many markets additionally authorize single-stock curbs and vast circuit breakers to keep the bid-ask spreads genuinely narrow.
For instance, circuit breakers kick in when single-day declines for the S&P 500 Index are 7% or below its previous close. A Level 2 circuit breaker hits on the off chance that the index drops 13%, and a Level 3 excursions on a 20% decline, trigging the exchange to close the market for the trading day. All circuit breakers with the exception of the Level 3 breaker brings about a 15-minute trading halt except if the drop happens at or after 3:25 p.m., in which case trading proceeds.
Curbs and circuit breakers mirror a lack of price continuity as well as advance it by giving purchasers and venders additional opportunity to discover prices.
Features
- Big, systemic occasions, for example, a government default or company earnings news can influence price continuity and increase the bid-ask spread, possibly halting marketing trading.
- Price continuity is a characteristic of a liquid market where the bid-ask spread, or difference between offer prices from purchasers and mentioned prices from dealers, is relatively small.
- Price continuity allows markets to trade rapidly and efficiently, by quickly matching purchasers with venders.
