Stock Price Formulation

How are prices determined when a special quote is indicated? (Part 1)

Update : Jan. 04, 2010

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Answer:

The renewal of special quotes (SQ) is a gradual process so as to minimise price volatility when the next execution price looks likely to be beyond the quote parameters. This process is explained below.

Let's assume that a market sell order of 200 shares is placed when the last price is 530 yen.
At that point the order book is as follows: a sell order of 100 at a limit price of 531 yen, a buy order of 100 shares at a limit price of 510 yen and a buy order of 300 shares at a limit price of 500 yen.

Offer Price Bid In theory this market sell order should be matched with the limit buy order with the highest price (510 yen). However, the gap between the two prices ( 530 yen and 510 yen) exceeds the permissible parameters (±10 yen).
200 M.O.
100 531  

530

520

# 510 100

500 300

Offer Price Bid So TSE indicates a sell SQ at 520 yen , a 10 yen decrease from the previous price of 530 yen. Once an SQ has been indicated, executions take place using the itayose not zaraba method.
What is the "Itayose" method?
200 M.O.
100 531  

530

S 520

510 100

# 500 300

Note: 'S' indicates a special quote
Now that the Itayose method is being used, the anticipated next price becomes 500 yen and all market orders must be executed. Thus, the market sell order of 200 shares will be matched at 500 yen with the 100 shares of the buy order at 510 yen, and 100 of the 300 shares of the buy order at 500 yen.

Offer Price Bid However, these orders can't be executed yet because the expected price (500 yen) is beyond the quote parameters based on the SQ of 520 yen. So the SQ is renewed to 510 yen after 5 minutes.
200 M.O.
100 531  

530

520

S 510 100

# 500 300

Offer Price Bid Once the SQ is lowered to 510 yen, the price of 500 yen is within the quote parameters, so the orders can be executed after 5 minutes.
Thus the market order is finally matched and executed.

M.O.
100 531  

530

520

510

500 200

Offer Price Bid Let's look at another variation. Suppose a new buy order for 200 shares at a limit price of 510 yen is entered while the SQ is at 510 yen.
200 M.O.
100 531  

530

520

S 510 100
200

500 300

Offer Price Bid In this case, the market sell order is immediately matched with the initial buy order of 100 shares at 510 yen and with 100 of the second limit order at the same price. Leaving a buy order of 100 shares at a limit price of 510 yen.

M.O.
100 531  

530

520

510 100

500 300

In this way investors placing market orders benefit from the best price available when an SQ is indicated, and price volatility if avoided.

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