What Is a Locked Market?
A locked market refers to a situation where the bid and ask price for a security is identical. This is an abnormal market condition—the bid price will always be below the ask price in normal trading conditions. Locked markets occur due to the complexity of modern financial markets.
- A locked market is a situation where the bid and ask prices for a security are temporarily the same.
- It arises due to timing differences in the arrival of price-quotation information from different stock market systems.
- Locked markets are a rare occurrence and generally do not last for long.
How Locked Markets Work
Today, investors who wish to buy or sell a company's shares are interacting with a large number of underlying markets and computer systems, all of which are aggregated together to present the single bid-ask spread that is shown to the investor.
For example, at any given time, the best available bid and ask prices for a security might be sourced from two different marketplaces. In theory, the information from different marketplaces is combined to present investors with a single unified view of the best available price.
In practice, however, the different computer systems involved in this process are all subject to minor differences in latency and processing speed, which gives rise to timing differences in the arrival of quote information.
For this reason, it's possible for the best available bid or ask price shown to be out of date, giving rise to a locked market in which the bid and ask price are identical. Theoretically, this situation would not arise since any match between the bid or ask price should result in the transaction in question being cleared. However, if one or both of the prices are outdated, then the transaction in question would not be able to clear, causing those prices to persist temporarily—a kind of financial mirage.
Locked Market vs. Crossed Market
Locked markets are related to crossed markets, which occur when the bid price is higher than the ask price. Crossed markets are also unusual circumstances that arise due to electronic and computerized trading.
Crossed markets tend to arise either during extremely fast trading conditions in volatile markets or extremely slow movement in illiquid markets. Fast trading may happen when market participants are selling in a panic.
Example of a Locked Market
Michael is a retail investor wishing to purchase shares in Apple (AAPL). When attempting to enter the order, Michael notices that the company has a bid-ask spread of zero, with both the bid and the ask listed as $108 per share.
As an experienced investor, Michael notices that this is an unusual circumstance. After all, if the buyers and sellers have agreed on a price, why would they not have already completed their transactions at $108 per share?
Upon investigating this question, Michael determines it's a locked market for this security, which has arisen due to timing differences in the spread of information between the different stock market systems involved in the price quotation. In practical terms, the locked market is a symptom of inaccurate information—one which generally dissipates fairly quickly.