Auction definition

In trading, an auction (or auction market) refers to the process by which the prices of shares are determined before the open, after the close, or during intraday volatility auctions to build or stabilise the order book. They allow traders to place market or limit orders directly on an exchange.

The set price of a particular share on an exchange is represented as the highest amount that a bidder is willing to pay for it and the lowest amount that a seller is willing to take for it. Because there are several competing bidders and sellers, there are several offers and asking prices.

Liquidity is concentrated during auctions in order to maximise the volume and minimise the surplus left by unmatched orders.

Orders may be entered, modified and cancelled during an auction period but no automated execution occurs. The indicative auction price and uncrossing volume will be updated whenever new orders are created, amended or deleted: resulting in a new auction price and volume.

Auction example

BP stock is being traded on the LSE. Five bidders have variously made offers for a single share at £449, £446, £442 and £439. There are also five sellers, who are asking for £457, £453, £450, and £449. The share would sell for £449. If someone was willing to sell for £446, the share would sell for that price instead.

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