What Is the Indicative Match Price?

In the securities market, the indicative match price is the price at which the maximum volume of orders can be executed at the time of an auction. If two or more prices can maximize executable volume or, in other words, there are multiple indicative match prices, the auction occurs at the last sale price. The indicative match price facilitates price discovery and transparency while helping resolve order imbalances.

Key Takeaways

  • The indicative match price is the best price at which the greatest number of buy and sell orders can be traded during a securities auction.
  • The indicative match price is important to price discovery, which is the process for setting the current price of a security.
  • As part of the auction process, the stock exchange will calculate and publish order imbalance information, which includes the indicative match price.
  • Using the order imbalance data, traders will then have the opportunity to adjust their trades in order to match up buy and sell orders.

Understanding Indicative Match Price

The indicative match price represents the best price at which the greatest number of buy and sell orders can be traded during the applicableĀ auction. Stock exchanges will hold two or three auctions each trading day. For example, the New York Stock Exchange (NYSE) holds open and closing auctions. The NYSE American holds three single-price auctions each trading day: the early open auction, core open auction, and closing auction.

These auctions enable participants to engage in real-time price discovery, which is the process for setting the current price of a security. An order imbalance (also known as auction imbalance) will occur if there are too many buyers or sellers for a particular security on a trading exchange. This imbalance prevents the matching of orders from buyers and sellers. Since the indicative match price is the best price that the maximum number of shares could be traded on a security, it represents a valuable piece of information for resolving the imbalance.

As part of the auction process, the exchange will calculate and publish auction imbalance information to participants. This information might include the indicative match price, total imbalance, market imbalance, matched volume, and auction collar. Using this data, traders will then have the opportunity to adjust their trades in order to match up buy and sell orders.

The indicative match price can be understood by considering a closing auction scenario. In this case, if there is no order imbalance, all market-on-close (MOC) orders are executed at the indicative match price. If an order imbalance exists, the maximum MOC orders are executed based on time priority.

The imbalance information published by an exchange right before the close may impact how a stock trades over the last few minutes of the day. The price may move up or down right before the end of the trading session to offset the imbalance.

Examples of Indicative Match Price

The following hypothetical examples demonstrate the concept of indicative match price for XYZ Company stock on the NYSE Arca exchange.

Example 1: No Order Imbalance

  • Market order to buy 2,500 shares of XYZ Company
  • Market order to sell 1,000 shares
  • Limit order to sell 500 shares at $25.50
  • Limit order to sell 1,000 shares at $25.75
  • Indicative match price = $25.75

This price will be published by NYSE Arca, which will also show a matched volume of 2,500 shares without an imbalance.

Example 2: Order Imbalance

  • Market order to buy 10,000 shares of XYZ Company
  • Limit order to sell 3,000 shares at $26
  • Market order to sell 1,000 shares
  • Limit order to sell 2,000 shares at $26.25
  • Indicative match price = $26.25

This price will be published by NYSE Arca, which will also show a volume of 10,000 shares and a total imbalance of 4,000 shares.

Special Considerations

While the indicative match price provides useful information that can help resolve order imbalances, it does not tell traders why an imbalance is occurring. Imbalances can occur if a major news event impacts the fortunes of a company, which is then reflected in the price of its shares. For example, a poor earnings report or the announcement of an unexpected merger or acquisition could certainly be the cause of an imbalance of orders.

An especially large or long-lasting imbalance could even result in halting or delaying the trading of shares until the imbalance is resolved. In some cases, a designated market maker will respond by buying or selling shares as needed to clear out excess orders and maintain liquidity in the market.