Definition
A call market is a type of market in which transactions are made only at certain specified intervals and prices are determined by supply and demand. In this market, buyers and sellers place their orders at the same time, but trading only occurs at a specific time when the market is “called.” This method of trading is primarily used in auctions, commodities, and securities exchanges.
Key Takeaways
- A call market is a type of financial market in which transactions are made only at specified times, rather than continuously. These pre-determined periods are known as “call” times.
- During a call market session, the amount and price of transactions are determined by matching buy and sell orders at a price that maximizes volume. This method of matchmaking can enhance the market’s efficiency and liquidity.
- Call markets are particularly suited to illiquid, less frequently traded assets. It facilitates trading without the need for continuous market making and can help to reduce transaction costs and risks associated with price volatility.
Importance
The finance term “Call Market” is important because it refers to a type of market in which transactions (buying and selling of securities) occur at specific times determined by market authorities, rather than throughout the trading day.
Orders are accumulated over a certain period and then matched at specific times, usually resulting in uniform prices.
This is particularly important for illiquid markets or infrequently traded securities where continuous trading is not feasible.
The aggregation of all buyer and seller orders at one time can enhance liquidity and price discovery.
A call market approach can mitigate the impact of price manipulation and encourage orderly trading, making it relevant in maintaining the stability of a financial system.
Explanation
In finance, a call market serves a critical purpose of efficiently matching buy and sell orders in a trading environment. This process is primarily used in scenarios where there is limited liquidity or a lack of continuous trading. A call market operates at specific times and involves a single price auction method which ensures that the maximum volume of assets is exchanged at the best possible price.
Hence, it fulfills its purpose of enhancing both the price discovery and liquidity function in an otherwise illiquid market. A call market is significantly used in the equities and commodities markets, especially those that do not have a constant stream of buy and sell orders. It efficiently clumps together all such orders, resulting in a single transaction price for executed trades.
For instance, the opening and closing auctions on many prominent stock exchanges make use of a call market mechanism. This enables the accumulation of orders at a single point in time, thereby easing the process of price discovery and reducing the bid-ask spread. Consequently, a call market tends to minimize price fluctuations and market volatility.
Examples of Call Market
New York Stock Exchange: The NYSE was not always an electronic and continuous market as we know it today. Traditionally, it was actually a call market, where all participants would come together at a specific time and a single price would be announced at which the security would trade. Trades in each listed stock occurred only once per day, when the exchange’s governing body found it could balance the maximum number of buy and sell orders. This system has since been replaced by a continuous market, where trades can be executed at any time throughout the trading day. However, the opening and closing auctions of NYSE can still be viewed as examples of call markets.
Gold Fixing by the London Bullion Market Association (LBMA): This is a modern example of a call market. This process, which happens twice daily, is when five leading members of the LBMA set the price for a contract in an auction-like process. This price is used as the official price for gold across the world.
The U.S. Treasury Auction: This is another example of a call market, where the U.S. Treasury Department holds regular auctions to refinance federal debt and raise new cash. During the auction, various dealers submit competitive bids and the price is set at the level that would sell all available securities.
FAQs about Call Market
What is a Call Market?
A Call Market is a type of market in which transactions are made only at certain specific times, usually when market participants are called together to transact. In other words, trading happens at specified intervals, not continuously.
How does a Call Market work?
In a Call Market, buy and sell orders are gathered together and then matched at specified times, corresponding to the maximum number of orders. Prices are usually determined by supply and demand.
What is the difference between a Call Market and a Continuous Trading Market?
In a Continuous Trading Market, trades can be conducted at any time during trading hours. In contrast, trades in a Call Market are conducted only at specified intervals. This arrangement allows all players to transact at the same time, therefore improving liquidity but decreasing flexibility compared to continuous trading.
What are some examples of Call Markets?
Some examples of Call Markets include the opening and closing auctions of many global stock markets, and the Call Auction used in the Paris Bourse.
What are the advantages of Call Markets?
Call markets can provide advantages such as diminishing information-based manipulation, reducing the impact of technical trading, and providing better liquidity and pricing efficiency under certain circumstances.
Related Entrepreneurship Terms
- Market Order: An instruction given to a broker to buy or sell a stock at the best available price.
- Liquidity: The ability to quickly buy or sell a security in the market without affecting its price.
- Limit Order: An order to a broker to buy or sell a stock at a specific price or better.
- Trading Session: A specific period of time during which trading of securities takes place.
- Clearing House: An intermediary that helps to settle trades and transfer funds between buyer and seller in a securities transaction.
Sources for More Information
- Investopedia: A comprehensive online resource offering information on financial terms, concepts, and strategies.
- Financial Dictionary: An online dictionary providing definitions of thousands of financial terms.
- Bloomberg: A major global provider of financial news and information, including real-time and historic price data, financials data, trading news and analyst coverage.
- The Economist: Offers authoritative insight and opinion on international news, politics, business, finance, science, technology and the connections between them.
