Auction Market Defintion & Theory

Auction Market Definition

An auction market is when buyers and sellers place their orders in the same environment and then negotiate the best execution price.  These orders were done mechanically in the past, but are now executed in seconds electronically.  The execution price is determined when the buyer's and seller's orders are equal.  The vast majority of global markets are based on the auction market model (equities, futures, options, etc.).

Auction Market in Action

Below is an example of auction market in action.  Let's say there is a 10,000 share buy order for MSFT at $20.  Conversely, there is a 10,000 share sell order at $20.10.  These orders are displayed in a Level II window and will produce a $.10 spread.  Now, at this point, there will be no movement in the market as there are no orders which equal.  So, either the buyer or seller will have to adjust their order to exit/enter their position.  This auction process is all done in real-time and is constantly in motion throughout the trading day.

Auction Market Theory

Trading Breakouts

There are auction market theories which state a trader can anticipate the validity of a move based on the volume executed at specific price points.  For example, if a stock has resistance at $100 dollars, but clears this level with less than 5% of the day's total volume, odds are it is a false breakout.   

Identifying Support and Resistance

Auction market theory can also be used to identify support and resistance levels.  A trader can utilize market depth, which is common on most trading applications.  A trader should look for heavy volume at key levels and chart formations to identify support and resistance levels.

Auction Market

Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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