What Is Itayose?
Itayose is a clearing method used by Japanese commodity exchanges to set prices. It is a form of auction market in which the time of order entry is not distinguished, and an opening price is derived on the principle of price priority.
Itayose is a modified version of the Walrasian market. Staff at exchanges that implement the Itayose method will post a provisional price to floor members. These members then submit buy and sell orders to the staff, who subsequently analyze the orders to adjust the provisional price. This process is repeated until a price matches all the buy and sell orders placed by the floor members, clearing all trades.
The Itayose Clearing Method
A contract price determined by the Itayose method is the price that maximizes the traded volume and minimizes the untraded volume according to the price and time priority rule. The conditions of that rule are that all market orders are executed first; next, all limit orders are executed to sell/buy at prices lower/higher than the execution price and, finally, the following amounts of limit orders to sell or buy are at the execution price.
According to the Japan Exchange Group, market orders have a priority based on the order acceptance time and are matched according to price and time priority rule. All the market orders that are not executed by the Itayose method are invalid. Therefore, market orders are not necessarily executed. Also, regardless of whether a transaction by the Itayose method is made, a trading session moves to the Zaraba method after the time to conduct Itayose passes with the exception of when the session ends.
An order acceptance period is established in the same way as the beginning of trading, and a transaction occurs by the Itayose method at the same time as the closing of the order acceptance period. If the price determined by closing auction exceeds the defined price range (Executable Price Range in Closing Auction) from the last contract price, a transaction is not made. The Executable Price Range in Closing Auction is the same as the Immediately Executable Price Range.
The Rules that Determine Contract Price by the Itayose Method
The Japan Exchange Group lays out the following rules for the Itayose method. The following is excerpted from their website:
- Condition 1: The price where bids and offers match within the range between one tick above the highest order price and one tick below the lowest order price*1.
- Condition 2: In the case where there are several prices that meet Condition 1, the price that maximizes the traded volume.
- Condition 3: In the case where there are several prices that meet Condition 2, the price that minimizes the difference between the cumulative volume of sell orders and the cumulative volume of buy orders ("surplus volume").
- Condition 4: In the case where there are several prices that meet Condition 1, the price will be either of the following: If the cumulative sell volume is larger than the cumulative buy volume at all such prices, the lowest price. If the cumulative buy volume is larger than the cumulative sell volume at all such prices, the highest price; or, the price in Condition 5.
- Condition 5: Either of the following prices: If the highest price of those that minimizes the surplus volume (limited to the lowest price among those where the surplus volume becomes selling on balance and the highest price among those where the surplus volume becomes buying on balance when the prices of selling on balance and buying on balance are included in the prices where the surplus volume is minimum), the highest price.
If there is a Reference Price*2 between the lowest price and the highest price of those prices that minimizes the surplus volume, the Reference Price.
If the lowest price of those that minimizes the surplus volume is higher than a Reference Price, the lowest price.