What is Call Auction?
A Call Auction is a method of trading in securities markets or other financial markets where buy and sell orders received over a period are matched once at a single price. During this period, investors can submit buy or sell orders for securities or other financial assets, and the opening price is determined based on supply and demand and the priority of order prices.
Call auctions usually occur in securities markets or other financial markets before opening hours, such as the minutes before the stock market opens. During this time, the exchange collects, organizes, and matches all submitted buy and sell orders to determine the opening price for each security. The trading during the call auction period follows specific rules and mechanisms aimed at achieving price discovery and fair trading.
In a call auction, the exchange matches orders based on price and quantity priorities to determine the opening price of securities or other financial assets. Generally, if the buy order prices are higher than the sell order prices, the opening price tends to be higher; if the sell order prices are higher than the buy order prices, the opening price tends to be lower. Unmatched orders during the call auction may enter a pending state until the subsequent trading session.
Characteristics of Call Auction
Although the rules and timing of call auctions may vary across different trading venues, they generally share the following characteristics:
- Price Discovery: Call auctions serve as a process for market price discovery. During this period, investors submit buy and sell orders. The exchange matches these orders based on price and quantity priorities to determine the opening price of securities or other financial assets, reflecting the market supply and demand and investors' price intentions.
- Fairness: The trading rules and mechanisms of call auctions ensure fairness. Orders are matched based on price priority, providing equal opportunities for all investors, regardless of their trade size, to participate in the auction process. This fairness helps maintain market credibility and investor confidence.
- Efficiency: Conducted over a brief period before the market opens, call auctions involve concentrated trading activities. Compared to continuous trading sessions, call auctions generally have lower trading volumes and higher efficiency, allowing exchanges to quickly complete the matching process and determine the opening prices, providing timely price information to investors.
- Restricted Trading: With generally lower trading volumes, market liquidity might be reduced during call auctions. The limited number of participating orders could restrict investors' buying and selling activities. Additionally, due to the short duration of the call auction period, investors must submit their orders within a limited timeframe.
- High Volatility: Due to lower trading volumes and liquidity during call auctions, prices can be more susceptible to fluctuations caused by small trades, leading to higher price volatility. Investors should be mindful of this volatility to avoid significant trade errors due to price swings.
- Importance of Opening Price: The opening price determined through a call auction serves as the starting point for the day's trading. It can influence investors' trading decisions and strategies, affecting their profit and loss as well as trade execution outcomes.
Types of Call Auctions
Different exchanges and financial markets may employ various types of call auctions. Here are some common types:
- Market Price Call Auction: In a market price call auction, orders are executed at the prevailing market price. The exchange matches orders based on supply, demand, and price priority, meaning trades occur at the best available market price, rather than a fixed specified price.
- Limit Price Call Auction: In a limit price call auction, investors specify the prices for their orders. The exchange matches orders based on price and quantity priorities, executing trades at the specified prices or better. This allows investors to control the trade price, although execution may be influenced by market supply and demand.
- Equilibrium Price Call Auction: Common in stock markets, this type involves the exchange collecting all buy and sell orders before the market opens, attempting to find a balance where the total quantity of buy orders equals the total quantity of sell orders. The opening price is determined based on market supply, demand, and order price priority.
- Gap Opening Call Auction: This type occurs when there is a significant price gap between the opening and the previous closing prices. If no suitable price range exists to match buy and sell orders at market open, the exchange might choose to skip this range and set the opening price at the gap price.
Trading Rules of Call Auctions
The specific trading rules for call auctions can vary by exchange and financial market. Generally, call auctions follow these rules:
- Order Submission Period: Exchanges specify the period for submitting orders, usually before the opening of the trading day. Investors must submit their orders within this timeframe to participate in the call auction.
- Market and Limit Orders: Investors can submit either market orders for execution at the best current market price or limit orders specifying a particular buy or sell price.
- Matching Mechanism: The exchange matches orders based on price and quantity priorities, often prioritizing market orders over limit orders.
- Price Priority: Orders are matched based on price priority. For buy orders, higher prices take precedence, while for sell orders, lower prices take precedence.
- Order Quantity Limits: The exchange may set limits on order quantities to ensure fairness and liquidity in the market.
- Unmatched Orders: Orders that are unmatched during the call auction due to price or quantity discrepancies may remain pending until the subsequent trading session.
- Determining Opening Price: The primary outcome of the call auction is the determination of the opening price for securities or other financial assets, based on the results of the order matching and market supply and demand during the call auction period.
Which Financial Markets Utilize Call Auctions?
Call auctions are widely used in many financial markets. Here are examples of markets where call auctions are applicable:
- Stock Market: The stock market is the most common financial market employing call auctions. Exchanges typically establish a call auction period before each trading day to determine opening prices for stocks. Investors can submit orders during this period to participate in the opening auction.
- Futures Market: The futures market extensively uses call auction mechanisms. Exchanges conduct call auctions to determine opening prices for futures contracts. Investors can submit buy or sell orders during the auction period to participate in the opening of futures contracts.
- Options Market: Some options exchanges also use call auction mechanisms to determine opening prices for options contracts. Investors can submit orders during this period to participate in the opening of options contracts.
- Commodity Market: Certain commodity markets, such as those for gold and crude oil, may also use call auctions to determine opening prices.
