What Is Price Continuity?
Price continuity is a serve as of a liquid market in which the bid-ask spread, or difference between offer prices from buyers and requested prices from sellers, is quite small. Price continuity shows a liquid market, for which there are many buyers and sellers for a given protection.
Price continuity must no longer be confused with low volatility. On the other hand, there is a courting between the two. Stocks with small average true ranges, a measure of volatility often applied to specific particular person securities, will have additional worth continuity. The an identical is true of exchange-traded worth vary representing an index.
Most often, alternatively, most exchanges check out not to prohibit volatility, while promoting worth continuity. This tends to put it up for sale setting pleasant worth discovery.
Key Takeaways
- Price continuity is a serve as of a liquid market in which the bid-ask spread, or difference between offer prices from buyers and requested prices from sellers, is quite small.
- Price continuity lets in markets to trade briefly and effectively, by the use of abruptly matching buyers with sellers.
- Massive, systemic events related to a government default or company source of revenue data can have an effect on worth continuity and increase the bid-ask spread, most definitely halting promoting and advertising and marketing purchasing and promoting.
How Price Continuity Works
Price continuity lets in markets to trade briefly and effectively, by the use of abruptly matching buyers with sellers. Without worth continuity, all of the amount of shopping for and promoting amount tends to fall, and so can the open passion of alternatives and futures markets. In addition to, a lack of worth continuity each so steadily halts market purchasing and promoting.
As an example, say a moderately liquid protection that trades more than 500,000 shares has a moderately slender bid-ask spread. This spread widens, alternatively, merely as the standard true range widens when the company publicizes source of revenue which can be each very powerful or susceptible relative to expectations, as this new wisdom is digested by the use of market contributors. On the other hand, worth continuity continues if numerous patrons step in to fill the void with additional bids and asks.
On the contrary, systemic events injury down worth continuity. As an example, say a government in Europe defaults on its sovereign debt, wiping out really extensive price for explicit banks and clamping down on the basic amount of global equity and bond purchasing and promoting. These kinds of events have an effect on worth continuity significantly. The gulf between bids and asks normally widens as a conceivable crisis unfolds.
Regulating Price Continuity
A little research suggests regulating worth continuity to some extent promotes market efficiency. In most markets, exchanges organize purchasing and promoting regulations for this very reasons why. As an example, exchanges each so steadily limit the day-to-day absolute worth change for a selected stock. Many markets moreover enact single-stock curbs and market-wide circuit breakers to stick the bid-ask spreads moderately slender.
As an example, circuit breakers kick in when single-day declines for the S&P 500 Index are 7% or beneath its previous close. A Degree 2 circuit breaker hits if the index drops 13%, and a Degree 3 trips on a 20% decline, trigging the exchange to close the market for the purchasing and promoting day. All circuit breakers excluding the Degree 3 breaker leads to a 15-minute purchasing and promoting halt apart from the drop occurs at or after 3:25 p.m., in which case purchasing and promoting continues.
Curbs and circuit breakers no longer most efficient mirror a lack of worth continuity however as well as put it on the market by the use of giving buyers and sellers time beyond regulation to seek out prices.
