Call Auction: Overview, Benefits and Examples

What Is a Call Auction?

A call auction, or call market, is where market participants place orders to buy or sell at certain bid or offered (ask) prices, which are then batched together and matched at predetermined time intervals. Orders collected during a call auction are all executed at the price that forms the best overall match. Call auction rules may vary by exchange.

Key Takeaways

  • In a call auction, bids and offers are aggregated and matched up with one another and then executed at predetermined intervals at a best-matched price.
  • Rather than trading continuously throughout the day, a call auction puts small orders together to make bigger trades in which participants arrive at one price.
  • By putting many orders together in batches that then trade at specific times, a call auction keeps liquidity flowing and can cut transaction costs for traders.
  • An example of a call auction would be the opening or closing rotation of a stock on an exchange by a specialist.

Understanding Call Auctions

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 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.

In a traditional call auction, an auctioneer "calls" out to solicit buy and sell orders for a security and then groups them for execution at specified times during a trading day. The auctioneer's job is to best match the supply and demand of a security to arrive at a clearing price.

All market orders for purchase and sale will be executed at that clearing price. The auctioneer will execute limit orders to buy at the clearing price or below and limit orders to sell at the clearing price or above.

Call markets are useful for illiquid securities or assets.

Benefits of a Call Auction

An electronic call auction clears buy and sell orders for a given asset at predetermined points 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.

Orders batched into call auctions are “priced” orders, meaning all orders are limit orders; there are no market orders involved. By contrast, in continuous trading, limit orders only trade at their limit prices when the market prices trigger the limit.

In the call auction, however, prices can improve for everyone. For instance, a buy order in a call may list $20.50 as the maximum price to pay but actually execute at $20.40. A seller, meanwhile, may have had the lowest price limit of $20.30, but receive $20.40 in the call auction.

Call auctions are more liquid than continuous trading markets, while continuous trading markets give participants greater flexibility.

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 the forex market, are continuous trading markets.

In a call auction, trades are instead executed according to an order-driven system. They use single-price auctions that match the orders of buyers and sellers 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.

Example of a Call Auction

A call auction is initiated in an illiquid stock to be traded at 1:00 p.m. EST. The stock's specialist gathers the following buy and sell orders beforehand:

  • Buy 50 shares at $885
  • Buy 75 shares at $875
  • Buy 100 shares at $870
  • Sell 100 shares at $870
  • Sell 75 shares at $880
  • Sell 50 shares at $890

The best match is decided at $870 per share. This is the call price that is executed for all orders that have been batched together at that moment.

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