Ready for a Call Auction?

by Investing School on March 14, 2012

A call auction has nothing to do with the new online world of Internet auctions, but as in any auction, people buy and sell things based upon certain offered prices. In a call auction investors buy or sell specific goods. Participants place orders with which they commit to buy or sell units at predetermined prices. All the orders are then matched up so as to create a viable contract.

This type of transaction is common in the securities market. It eliminates older trading methods where orders were continuously compared and matched. For new buyers in particular this can eliminate some of the confusion associated with trying to master several skills at once. The buyer simply sets the highest price they are willing to pay in order to purchase specific assets while the seller sets the lowest price they will accept. Once the match is made, the contract is completed. This practice also helps reduce price instability.

One caveat to the matching process is that such limit orders are collected over a set period of time. Once that interval is over the price that allows for the greatest number of orders to be processed is chosen. While call auctions help to concentrate assets they require investors to wait until the subsequent auction to find out if they succeeded in their previous bids. With the waiting period established, call auctions also cause the market to respond in a slower fashion.

A final use for call auctions: some stock exchanges utilize them to help fix the price of opening and closing.

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