WHAT IS 'Price Continuity'

Price continuity is a characteristic of a liquid market in which the bid-ask spread, or difference between offer prices from buyers and requested prices from sellers, is relatively small. Price continuity reflects a liquid market, for which there are many buyers and sellers for a given security.

Price continuity should not be confused with low volatility. However, there is a relationship between the two, as stocks with small average true ranges, a measure of volatility often applied to individual securities, may have more price continuity. The same is true of exchange-traded funds representing an index.

In general, however, most exchanges try not to restrict volatility, while promoting price continuity. This tends to promote efficient price discovery.

BREAKING DOWN 'Price Continuity'

Price continuity allows markets to trade quickly and efficiently, by rapidly matching buyers with sellers. Without price continuity, the overall amount of trading volume tends to fall, and so can open interest of options and futures markets. In addition, a lack of price continuity sometimes halts market trading.

For example, say a fairly liquid security that trades more than 500,000 shares has a fairly narrow bid-ask spread. This spread widens, however, as does the average true range, widen when the company announces earnings that are either very strong or weak relative to expectations, as this new information is digested by market participants. However, price continuity continues if if a large number of traders step in to fill the void with more bids and asks.

On the contrary, systemic events break down price continuity. For example, say a government in Europe defaults on its sovereign debt, wiping out substantial value for particular banks and clamping down on the overall volume of global equity and bond  trading. These types of events affect price continuity substantially. The gulf between bids and asks usually widen as a potential crisis unfolds.

Regulating Price Continuity

Some research suggests regulating price continuity to a degree promotes market efficiency. In most markets, exchanges set up trading rules for this very reason. For example, exchanges sometimes limit the daily absolute price change for a particular stock. Many markets also enact single-stock curbs and market-wide circuit breakers to keep bid-ask spreads fairly narrow.

For example, circuit breakers kick in when single-day declines for the S&P 500 Index are 7% or below its previous close. A Level 2 circuit breaker hits if the index drops 13%, and a Level 3 trips on a 20% decline, in which case the exchange closes the market for the trading day. All circuit breakers result in a 15-minute trading halt, unless they occur at or after 3:25 pm, in which case trading continues.

Curbs and circuit breakers not only reflect a lack of price continuity, they promote it by giving buyers and sellers more time to discover prices.

RELATED TERMS
  1. Bid

    A bid is an offer made by an investor, trader or dealer to buy ...
  2. Price Tension

    Price tension occurs when there is a large difference between ...
  3. Buyer's Market

    A situation in which supply exceeds demand, giving purchasers ...
  4. Thin Market

    A thin market is a market with a low number of buyers and sellers, ...
  5. Seller's Call

    An agreement between a buyer and a seller for a specific grade ...
  6. Seller Financing

    Seller financing refers to a real estate agreement where financing ...
Related Articles
  1. Investing

    How To Calculate The Bid-Ask Spread

    It's very important for every investor to learn how to calculate the bid-ask spread and factor this figure when making investment decisions.
  2. Trading

    The Basics of the Bid-Ask Spread

    The bid-ask spread is the difference between the bid price and ask price prices for a particular security.
  3. Investing

    The Pros and Cons of Owner Financing

    Details on the upside and risks of this type of deal for both the owner and the buyer.
  4. Investing

    The Opening Cross: How Nasdaq Stock Prices Are Set

    Learn how the opening cross auction process determines prices of Nasdaq-listed securities at market open to ensure liquidity by matching buyers and sellers.
  5. Investing

    Key Home Upgrades That Make Or Break The Deal

    When making a home purchase, pay attention to key features of the home that either should meet a certain standard or should be upgraded by the seller.
  6. Managing Wealth

    Rent-to-own homes: How the process works

    Here's what to watch for when negotiating a contract for a rent-to-own home – and who is a good candidate for this option.
  7. Investing

    7 Tips for Writing a Homebuyer’s Letter to a Seller

    To win a real estate bidding war, use these seven tips for writing a homebuyer’s letter to a seller that’s engaging and personal.
  8. Investing

    4 Ways Millennials Can Buy Private Businesses

    Buying private businesses is a good way to have greater control over your investments while increasing your income and avoiding the fluctuations of the market.
RELATED FAQS
  1. What are the determinants of a stock's bid-ask spread?

    Stock exchanges are set up to assist brokers and other specialists in coordinating bid and ask prices. The bid price is the ... Read Answer >>
  2. What are the Differences Between Ex Works (EXW) and Free On Board (FOB)?

    Although these terms are similar, responsibilities and obligations are delegated to different parties in EXW and FOB. Read Answer >>
Hot Definitions
  1. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  2. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  3. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  4. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  5. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  6. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
Trading Center