The call market refers to a market where trading does not take place continuously, but only at specified times during the trading day. Prices are dictated by the exchange rather than by bids and offers. In the call market, orders are aggregated and collected at designated intervals instead of trading throughout the day.
Orders in the call market are transacted at specific time intervals, and sell and buy prices are then calculated. The exchange will calculate the clearing price in the market based on the number of shares or securities sold by the sellers and the bid by the purchasers. Call markets are not used except for illiquid securites or in cases where there are few traders and few transactions take place.
The call market refers to a market where trading does not take place continuously, but only at specified times during the day.
Buy and sell orders are aggregated and collected at designated intervals and are matched to arrive at a clearing price.
All participants in the call market are called to be available at the same place and time. Such a moment on the exchange is referred to as a trading session.
How the Call Market Works
In the call market, the auctioneer calls for buy and sell security orders and groups them for execution at designated times during the business day. The role of the auctioneer is to balance the supply and demandfor a security in a better way to reach a clearing price.
Both buy and sell orders on the exchange shall be made at the clearing price. The auctioneer will execute some small buying orders at or below the clearing price and will restrict orders to be sold at or above the clearing price.
For example, assume that for Company ABC, the following buy orders are received:
Buy 500 shares at $4.50
Buy 600 shares at $4.00
Buy 400 shares at $4.20
Buy 700 shares at $4.50
Buy 400 shares at $4.25
Sell 500 shares at $4.50
Sell 600 shares at $4.00
Sell 400 shares at $4.20
Sell 700 shares at $4.50
Sell 400 shares at $4.25
In the call market, buy orders are bundled together and performed at a price and time that will clear much of the orders. In the example above, the clearing price would be set at $4.00. It can be seen here that even if some of the parties were ready to purchase or sell for $4.50, the price that clears the majority of the trades is $4.50, and that is the price at which the auctioneer executes the trades on the call market.
Usefulness of the Call Market
Call markets bring together the few buyers and sellers of a security to trade at the same place and time. Such a moment on the exchange is referred to as the trading session, which provides more liquidity for the investments. This process allows for the optimization of executing all potential transactions. All markets are frequently used in small economies where governments issue bonds or notes.
Call markets are seldom used in comparison auction markets, where price setting and trades occur continually between multiple buyers and sellers. However, the call markets are helpful for illiquid securities or when there are few sellers and buyers to establish an active market.
The drawback is that the traders in the call market are prone to greater price uncertainty. They submit their orders and then wait for the determination of the clearing price. The traders in the call market are, however, covered by limitations on variations from the previously executed price.
CFI offers the Capital Markets & Securities Analyst (CMSA)® program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below: