Share liquidity and the opening auction

The price of a share is not produced evenly through the day. Turnover clusters heavily at the open and at the close, thins through the middle, and is produced at the two ends by a mechanism that is not continuous trading at all. Understanding a call auction explains a long list of things that otherwise look arbitrary: why the first print of a session can sit far from the last print of the previous one, why the official closing price is treated differently from the last trade, and why a share can stop trading for several minutes without any announcement.

What liquidity actually is in an order book 

A central limit order book holds every resting order, sorted by price and then by the time it arrived. The highest bid and the lowest offer form the top of the book, and the distance between them is the spread. Behind each of those sits a queue of further orders at successively worse prices, and the quantity available at each level is the depth. Liquidity is the combination of the two: how narrow the spread is, and how much can be transacted before the price has to move.

An order larger than the quantity resting at the top of the book is filled in pieces at successively worse prices, and the difference between the price expected and the average price achieved is slippage. That is the honest definition of illiquidity: not that trading is impossible, but that transacting size costs distance. It is why a share's spread and its depth describe the same property from two angles, and why a headline spread alone says very little about a large order.

The shape of the trading day 

Turnover through a session traces a familiar curve. It is heaviest immediately after the open, when everything that accumulated overnight is expressed at once, falls away through the middle of the day, and rises sharply into the close. The close is frequently the single busiest period of all, because index funds, benchmarked portfolios and any strategy valued at the official close must transact at that price to avoid a difference from their benchmark, so their orders converge on one moment by construction.

The middle of the session is thinner, and thinner in a way that varies by market: a European share's depth improves when the United States session begins, while a share whose only natural holders are domestic sees no such improvement. Neither observation is advice about when to deal, and both are simply properties of when the participants in a given book are present.

How a call auction works 

During a call auction the book stops matching. Orders are accepted, amended and cancelled, but nothing trades. The exchange publishes an indicative uncrossing price and an indicative volume throughout the call, so participants can see where the auction would strike if it ended at that instant. At the scheduled moment, usually with a short randomised delay so the exact end cannot be timed, the book uncrosses: one price is chosen, and every order that can trade at that price does so, all at once, in a single event.

The chosen price is the one at which the largest quantity can be matched. Where more than one price would match the same quantity, tie breaking rules apply, typically the price leaving the smallest residual imbalance and then the price closest to a reference such as the previous close. The arithmetic is simple enough to follow directly.

Two consequences follow from the last row. The residual imbalance does not trade, so it either rests in the continuous book afterwards or is cancelled, and the imbalance published during the call is itself information that participants respond to, which is why indicative prices move during an auction rather than sitting still.

The closing auction, and why it carries so much weight 

The closing auction produces the official closing price, and that price is used far beyond the trading day. Index levels are calculated from it. Funds are valued on it. Benchmark performance is measured against it. Derivative settlements reference it. Anything obliged to match a benchmark therefore has a strong reason to transact at exactly that price rather than near it, and the proportion of daily turnover occurring in the closing auction has grown steadily as index tracking has grown.

The effect is most visible on index review dates. When a benchmark adds a constituent, removes one, or changes a float factor, every tracking fund must adjust its holding by the effective close, and the entire adjustment converges on one auction. Turnover on those dates can be many times a normal session's, and the price behaviour around them is driven by that concentration of mechanical flow rather than by any view about the companies involved.

Volatility auctions and trading halts 

Most venues interrupt continuous trading in a single share when its price moves beyond a defined band within a short window, and they restart it with a fresh call auction lasting a few minutes. The purpose is to convert a fast one sided move into an event in which orders accumulate and a single price is struck with the imbalance visible to everyone. Separately, an exchange may halt a share entirely pending a company announcement, and market wide circuit breakers halt everything when a benchmark falls beyond a threshold.

Why gaps exist, and where they come from 

A gap is what an auction produces when information arrived while the book was closed. Nothing traded between the previous close and the new uncrossing price, so the price series shows a jump with no intervening prints. The longer the closure, the more news it can accumulate, which is why weekend gaps are conventionally larger than overnight ones and why a multi day national holiday can produce a very large one. Venues with a midday break, described in the guide on Asia Pacific shares, can produce a second gap inside a single session.

Company results scheduled outside the session are the most common single cause. A result released after the close is absorbed by an auction the following morning, and the whole revision appears at once as the opening print rather than as a sequence of trades a participant could have transacted through.

What all of this does to a contract on the share 

A CFD written on a share references the underlying's published price, so every one of these mechanisms reaches it. While a share is in a call auction there is no continuous two way price in the underlying, so the contract cannot be dealt against a price the underlying is not making, and quoting is either suspended or materially wider through that period. The same holds through a halt.

Gaps reach the contract in full. An order resting at a price the underlying never traded through cannot be filled at that price, because no price existed between the two prints; it is filled at the first price the market makes when trading resumes, which may be a substantial distance away. This is a property of the underlying market's structure rather than of any broker, and it is the reason a resting order is described as an instruction about price rather than a guarantee of one.