Call auction

A call auction is an alternative to the continuous matching of orders usual in securities markets.

Limit orders are collected over a (fixed) period. At the end of this time the orders are processed in the auction. The price that enables the largest number of orders to be executed is chosen: if the price were higher the trade volume would fall through lack of buys, if the price were lower the trade volume would fall through lack of sells.

Call auctions concentrate liquidity, but have a number of obvious disadvantages:

  • Investors have to wait until the next auction is held to find out if their orders have executed.
  • The market reacts more slowly to news.

Call auctions are used by some stock exchanges to fix opening or closing prices — trading starts or ends with a call auction. Their use as a main trading mechanism is now rare.

Copyright Graeme Pietersz © 2005-2020