What is Zaraba method
Zaraba method is a method of matching orders that involves using an auction-like process to trade securities. The orders are organized by both their prices and the time that they were taken. This is known as the price and time priority rule. The established algorithm then automatically matches orders and bids.
As soon as an order for a security is delivered, it is compared and matched with orders already in the order book. When a bid comes in that matches the price requested by another order, the two orders are executed and taken out of the order book.
BREAKING DOWN Zaraba method
The Zaraba method is sometimes also referred to as the “continuous trading auction” method of trading securities. That term makes sense because this method is used to make sure that trading proceeds continuously without interruption throughout the day.
The Zaraba Method and Itayose Method
The Zaraba method is most often associated with the Japanese stock exchanges, particularly the Tokyo Stock Exchange.
Typically, the Zaraba method is used during normal trading sessions. By contrast, a different order matching method, which is called the Itayose method, is used to determine the opening and closing prices for each morning and afternoon trading session. The Itayose method is sometimes also called the “call auction” method.
All orders made before the market opens are given an equal priority, and can then be matched once the market opens using the Itayose method. With the Itayose method, time of order entry is irrelevant, as orders issued before the opening are all competing against each other on an equal priority. The opening price is determined based on the principle of price priority, and all market orders are executed first, then followed by all limit orders, which are executed to sell or buy at prices that deviate from the execution price. Lastly, a certain amount of limit orders are processed to sell or buy at the execution price.
The Itayose method is also employed after any temporary halt in trading activity. The Itayose method establishes a contract price to ensure traded volume is maximized while untraded volume is kept to a minimum. During the Itayose method period, market orders that are not executed are considered void and invalid.
Once the designated time period during which the Itayose method applies has passed, the trading session automatically transitions into the Zaraba method phase. These are both methods that operate under the flexible price mechanism of price determination, as opposed to the fixed price approach.