What is Call Auction
A call auction is where participants buy or sell units of a good. At a call auction, participants place orders to buy or sell units at certain buying or selling prices. Orders collected during a call auction are matched to form a contract. Call auction rules vary by auction.
BREAKING DOWN Call Auction
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 minimum price at which they are willing to sell the stock shares. Most major stock markets open and close trading with a call auction, while a continuous market for trading operates the rest of the day. Call auctions batch orders together to create large multilateral trades in which buyers and sellers arrive at a single price.
How Call Auctions Work
An electronic call auction clears buy and sell orders for a given asset at a predetermined point in time. By bunching many transactions together, a call market increases liquidity and can significantly decrease transaction costs for participants. As an alternative market structure, call auctions impact order flow and handling decisions, price discovery and market transparency.
For example, orders put into call auctions are “priced” orders, meaning all orders are limit orders. There are no market orders. By contrast, in continuous trading, limit orders trade at their limit prices when they execute. In the call auction, however, prices can improve for everyone. For instance, a buy order in a call may have a maximum price to pay of $20.50, but executes at $20.40. A seller may have had a lowest price limit of $20.30, but receive $20.40 in the call auction.
Call Auctions vs. Continuous Trading
In a continuous trading market, traders can trade at any time 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 forex market, are continuous trading markets.
In a call auction, trades are executed according to an order-driven system. They use single price auctions that match buyers and sellers orders, and then, a single trading price is chosen that will maximize volume.
Both types of markets have their own advantages and disadvantages. The biggest advantage of a call auction is that it provides high liquidity as all traders interested in a security have to make their trades at the same time and place. Continuous markets, meanwhile, give traders the flexibility to make their trades whenever they want.