Stock Price Formulation
What is a closing auction at the limit price?
Update : Jan. 04, 2010
Answer :
As explained in 'What are the 'daily price limits'?', all stocks have fixed ranges within which their prices can fluctuate during a day. Occasionally, as mentioned in 'Why are special quotes sometimes not renewed to their daily limit prices? ', a special quote may be continue to be renewed until it reaches this daily price limit. As a result of strong negative or positive public sentiment, there may be occasions when there is a major order imbalance at either end of these daily price limit parameters.
- What are the 'daily price limits'?
- Why are special quotes sometimes not renewed to their daily limit prices?
If TSE ignores these situations and does nothing to rectify the situation at the closing auction investors will be deprived of the opportunity to trade these stocks. So TSE uses a special mechanism to determine the afternoon session closing price when the last transaction took place at the limit price, and the normal Itayose method cannot achieve execution for the closing price.
[Requirements of Closing Auction at the Limit Price]
- When a bid (offer) SQ is indicated at the upper (lower) limit price at the closing auction of the afternoon session, all buy (sell) market orders are treated as buy (sell) limit orders at the upper (lower) limit price, and added to the buy (sell) limit orders.
- If there are at least one unit of shares on the sell (buy) side of the order book, the distribution by the "closing auction at the limit price" will take place.
When there are insufficient shares to meet these requirements, trading will close without a closing executed price. (For a detailed methodology please see 'How are closing auctions at the limit price processed? (Part 1)'.)