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Croda (CRDA) shares trading in a Closing Auction Call

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TheMotorcycleBoy
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Croda (CRDA) shares trading in a Closing Auction Call

#214212

Postby TheMotorcycleBoy » April 10th, 2019, 6:33 pm

Hi Folks,

Tomorrow (11/4/2019) is ex-dividend day for Croda's final divi, so seeing as on 29/4/2019 they plan on doing a 42->41 share split and *also* go ex-dividend on a special dividend, I choose today to top up my holding in order that I have 42 of their shares. I set a buy-limit at 5040 and I was surprised to wing it.

However, on reviewing the behaviour of the SP for today on https://www.londonstockexchange.com/exc ... ml?lang=en I observed something unusual (well to me at least!). That was that from about 1615-1630, the Trading status for CRDA was described as Closing Auction Call.

In fact the LSE stock daily status table looked like this:



(Note that the LondonStockExchange status page for CRDA no longer expresses the status I've displayed above.)

And a batch of the trades at around that time were all priced at 5068-5070:



I briefly read some stuff online about call auctions, and whilst not providing a complete answer, I now have formed the view that for the limited period above (1615-1630ish on 10/04/2019) the buy and sell prices were set at 5070 and 5068 respectively. Is it possible that this action was taken to ensure orderly trading in the last quarter of an hour while the shares were cum-dividend?

I'm also curious that all of the buys are "off-book" (does that just mean a regular buy from the order book?) and the sales called "Automatic trade" (or algorithmic). Just wondering if either of those terms are relevant to this "Closing Auction Call" which I observed.

If anyone on TLF knows anything about Closing Auction Calls (and if they frequently occur on the last cum-dividend day) then I love to hear their views and/or explanations.

Many thanks
Matt

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Re: Croda (CRDA) shares trading in a Closing Auction Call

#214280

Postby Breelander » April 11th, 2019, 12:16 am

TheMotorcycleBoy wrote:If anyone on TLF knows anything about Closing Auction Calls (and if they frequently occur on the last cum-dividend day) then I love to hear their views and/or explanations.


There are three scheduled SETS auctions each day, in which almost every share participates. These are used to set the opening and closing price for each share.

Scheduled SETS auctions;

Opening Auctions – Every day from 7:50 to 8:00 (Establishes the opening price of a stock).
Intraday midday Auction – Every day from 12:00 to 12:02 (Can run until 12:16 if the stock moves a certain percentage during the initial auction)
Closing Auctions – Every day from 16:30 to 16:35 (Establishes the closing price of a stock).


However, yours was unusual in that it occurred before the close.

Unscheduled SETS auctions;

A five minute auction that occurs if a stock price moves a certain percentage from the last automatic trade.
https://help.ii.co.uk/system/templates/ ... y-Auctions

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Re: Croda (CRDA) shares trading in a Closing Auction Call

#214290

Postby TheMotorcycleBoy » April 11th, 2019, 6:56 am

Breelander wrote:There are three scheduled SETS auctions each day, in which almost every share participates. These are used to set the opening and closing price for each share.

Scheduled SETS auctions;

Opening Auctions – Every day from 7:50 to 8:00 (Establishes the opening price of a stock).
Intraday midday Auction – Every day from 12:00 to 12:02 (Can run until 12:16 if the stock moves a certain percentage during the initial auction)
Closing Auctions – Every day from 16:30 to 16:35 (Establishes the closing price of a stock).

Many thanks for this. Very helpful and informative. I've just pulled up the London Stack Exchange prices and markets page for various LSE-traded stocks (e.g. LGEN, LLOY, CRDA, GAW, TATE), and I can see if I select the day view and hover the mouse pointer very gingerly near the right hand edge of the prices box, a little twitch in price is often noticeable between 16:30-16:35.

The morning auction 7:50-8:00 is quite interesting too, since due mine and Mel's regular week day, when we buy stocks we usually do it by just setting a limit order either in the evening after close or first thing in the morning (e.g. 6.00-7.00am). Now I can see why for some stocks/trades the price really zooms away quite markedly around about opening.

Note I'm not necessarily trying to time the market, just trying to be as stingy in my order setting as possible, without having to waste my day over it!

Breelander wrote:However, yours was unusual in that it occurred before the close.

Yes and the price chart gave me the impression of a flat line between 16:15-16:30. Weird. But perhaps it relates to the stock now being XD and the weird share split they proposing to do at the end of the month.

thanks again
Matt

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Re: Croda (CRDA) shares trading in a Closing Auction Call

#214357

Postby Gengulphus » April 11th, 2019, 11:01 am

I don't know the technicalities well (I did have a good idea about them several years ago, but the LSE has moved on and my knowledge hasn't), but if you want to investigate them in (a lot of) detail, you may want to study the LSE's guide to its trading system, plus possibly some others of its technical specifications. PDF searches reveal that the guide doesn't actually contain the exact phrase "closing auction call", but does include a fair number of occurrences of "auction call" and they include "Close (auction call)". If my impression from a very quick skim of the information it contains is correct, an "auction call" is the technical term for what is normally just called an "auction", consisting (slightly simplified) of a typically-roughly-5-minute period in which orders are gathered by the order book system but not matched up with each other as they are during normal trading, and ending up with a grand matching up of those orders to produce a single "uncrossing trade" with multiple buyers and sellers, after which normal trading starts for the day, resumes, or remains ended for the day, depending on whether it is an opening, intraday or closing auction. (I should probably add that that's a description of what the LSE's systems do: normal broker accounts only even try to execute orders during normal trading, not during auctions, and at least very largely use the Retail Service Provider (RSP) network to execute them rather than the LSE's order book system. I suspect a "Direct Market Access" or "DMA" account would allow one to enter orders during auctions, since it's supposed to give direct access to the LSE's order book system, but don't actually know that because I've never had one. Only a few brokers supply them, and AFAIAA they all require one to persuade them first that you're in a more financially sophisticated category of client than an ordinary retail client and consequently to give up some of the regulatory protections for ordinary retail clients. I'm pretty certain I meet their requirements for that - but my investing style means that I would get little or no benefit out of a DMA account, so I don't see any point in giving up the protections!)

What does seem odd is your statement that "Closing Auction Call" appeared between about 16:15 and 16:30; the closing auction normally starts at 16:30 and ends about 16:35 and as far as I can see in yesterday's trades list the closing auction went completely normally for Croda: very normal-looking trades up to just before 16:30 (the last one is timed 16:29:55), then a gap until the closing auction's "uncrossing trade" (type UT) at 16:35:23. An intraday auction is conceivable, but they're not all that common, I'd be very surprised to see them described as a "Closing Auction Call", and there are no type UT trades other than the 16:35:23 one after 16:00 - which doesn't exclude an intraday auction having occurred that didn't result in any shares being traded, but together with the others, make an intraday auction look pretty unlikely to be the explanation.

It's a bit difficult to see many other possible explanations besides a glitch in the LSE's systems, but I have spotted one possibility: is it possible that you only got the time of day from an LSE page and failed to take the second part of a statement like "As at 11-Apr-2019 10:42:28 - All data delayed by at least 15 minutes." (copied a few minutes before posting this) into account? That could for instance have resulted in you looking at the LSE's status at 16:32 but thinking it was 16:17...

As regards the "off book" question, I believe that means that the trade was executed elsewhere than on the LSE's order book system, such as on the RSP network, but reported through the LSE's trade reporting system. The RSP network is incidentally the trading system that executes orders by the 'give a quote, you get 15 seconds to accept it or it expires' method you're probably familiar with. The LSE's order book system isn't capable of that - which is the source of quite a bit of confusion among private investors who somewhat naïvely think that they're dealing with the LSE when they trade their shares. For instance, if they try to trade fewer shares than the number market makers are obliged to keep quotes for and it still fails, or they have a limit order in and the official LSE bid or offer price indicates the limit has been met but it's still not being executed, they think the LSE is failing to adhere to its own rules - but the actual reason is probably that they're not dealing with the LSE at all!

Gengulphus

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Re: Croda (CRDA) shares trading in a Closing Auction Call

#214460

Postby TheMotorcycleBoy » April 11th, 2019, 6:10 pm

Thanks Geng!

Gengulphus wrote:I don't know the technicalities well (I did have a good idea about them several years ago, but the LSE has moved on and my knowledge hasn't), but if you want to investigate them in (a lot of) detail, you may want to study the LSE's guide to its trading system, plus possibly some others of its technical specifications. PDF searches reveal that the guide doesn't actually contain the exact phrase "closing auction call", but does include a fair number of occurrences of "auction call" and they include "Close (auction call)". If my impression from a very quick skim of the information it contains is correct, an "auction call" is the technical term for what is normally just called an "auction", consisting (slightly simplified) of a typically-roughly-5-minute period in which orders are gathered by the order book system but not matched up with each other as they are during normal trading, and ending up with a grand matching up of those orders to produce a single "uncrossing trade" with multiple buyers and sellers, after which normal trading starts for the day, resumes, or remains ended for the day, depending on whether it is an opening, intraday or closing auction. (I should probably add that that's a description of what the LSE's systems do: normal broker accounts only even try to execute orders during normal trading, not during auctions, and at least very largely use the Retail Service Provider (RSP) network to execute them rather than the LSE's order book system. I suspect a "Direct Market Access" or "DMA" account would allow one to enter orders during auctions, since it's supposed to give direct access to the LSE's order book system, but don't actually know that because I've never had one. Only a few brokers supply them, and AFAIAA they all require one to persuade them first that you're in a more financially sophisticated category of client than an ordinary retail client and consequently to give up some of the regulatory protections for ordinary retail clients. I'm pretty certain I meet their requirements for that - but my investing style means that I would get little or no benefit out of a DMA account, so I don't see any point in giving up the protections!)

Wow those documents! I opened the first one, and noticed it was 98 pages long and nearly closed it there and then in horror! I did however, briefly skim over it and noticed that it is indeed similar to a high level software specification. And being a programmer I'll bookmark it and probably take another look at it later on from technical perspective.

What does seem odd is your statement that "Closing Auction Call" appeared between about 16:15 and 16:30; the closing auction normally starts at 16:30 and ends about 16:35 and as far as I can see in yesterday's trades list the closing auction went completely normally for Croda: very normal-looking trades up to just before 16:30 (the last one is timed 16:29:55), then a gap until the closing auction's "uncrossing trade" (type UT) at 16:35:23. An intraday auction is conceivable, but they're not all that common, I'd be very surprised to see them described as a "Closing Auction Call", and there are no type UT trades other than the 16:35:23 one after 16:00 - which doesn't exclude an intraday auction having occurred that didn't result in any shares being traded, but together with the others, make an intraday auction look pretty unlikely to be the explanation.

It's a bit difficult to see many other possible explanations besides a glitch in the LSE's systems, but I have spotted one possibility: is it possible that you only got the time of day from an LSE page and failed to take the second part of a statement like "As at 11-Apr-2019 10:42:28 - All data delayed by at least 15 minutes." (copied a few minutes before posting this) into account? That could for instance have resulted in you looking at the LSE's status at 16:32 but thinking it was 16:17...

I wish I'd screen shotted it now! I'm starting to query my exact memory now....I think it was say 5-10 minutes after 16:30 when I looked at the LSE page. And the reason why I mentioned 16:15 - 16:30 was purely because when I squinted at the day's screen chart there was a flatline at about that time interval.

But yeah, perhaps it was just a glitch in how that webpage was rendered.

My main point of curiousity, was mainly to try to understand the auction was about. But now I discover they are actually commonplace. I'm going to try to read up some more about these, and also about the concept of "uncrossing trade" (UT) which seems to come up from time to time.

Currently trying to get a handle on a worked example of this from here:

https://www.thebushveldperspective.com/ ... lation-291

As regards the "off book" question, I believe that means that the trade was executed elsewhere than on the LSE's order book system, such as on the RSP network, but reported through the LSE's trade reporting system. The RSP network is incidentally the trading system that executes orders by the 'give a quote, you get 15 seconds to accept it or it expires' method you're probably familiar with. The LSE's order book system isn't capable of that - which is the source of quite a bit of confusion among private investors who somewhat naïvely think that they're dealing with the LSE when they trade their shares. For instance, if they try to trade fewer shares than the number market makers are obliged to keep quotes for and it still fails, or they have a limit order in

So since I do almost all my buying now by setting limit orders, do they still use the 'give a quote, you get 15 seconds to accept it or it expires', behind the scenes? But of course with the software doing the virtual mouse click for the yes "Accept the quote and buy" bit?

and the official LSE bid or offer price indicates the limit has been met but it's still not being executed, they think the LSE is failing to adhere to its own rules - but the actual reason is probably that they're not dealing with the LSE at all!

Sure, this has happened to us a few times with limit orders for AIM shares, but I guess that for us it's because the spread is quite big, so unless there's a glut of liquidity and the price is stable for long enough, it's quite easy for the price to move in the other direction and the order doesn't get filled.

thanks again,
Matt

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Re: Croda (CRDA) shares trading in a Closing Auction Call

#214535

Postby TheMotorcycleBoy » April 12th, 2019, 6:40 am

Gengulphus wrote:What does seem odd is your statement that "Closing Auction Call" appeared between about 16:15 and 16:30; the closing auction normally starts at 16:30 and ends about 16:35 and as far as I can see in yesterday's trades list the closing auction went completely normally for Croda: very normal-looking trades up to just before 16:30 (the last one is timed 16:29:55), then a gap until the closing auction's "uncrossing trade" (type UT) at 16:35:23. An intraday auction is conceivable, but they're not all that common, I'd be very surprised to see them described as a "Closing Auction Call", and there are no type UT trades other than the 16:35:23 one after 16:00 - which doesn't exclude an intraday auction having occurred that didn't result in any shares being traded, but together with the others, make an intraday auction look pretty unlikely to be the explanation.

Hi Geng,

I think I understand the error of my ways now. I was definitely looking at the LSE shortly after 16:30. I may even have been viewing it whilst the Auction was occurring. I think that when I observed the reported current status as being "Closing Auction Call" and then noted (what I believe was rendered on-page at the time) a flat line in SP between 16:15-16:30, I automatically assumed the two events (i.e. the Auction Call and the flat line) to be part of the same thing. Now after you and Breelander have explained these Auction calls in more detail, it would appear that the previous assumption (i.e. the association of the two observations) was incorrect.

The concept "Uncrossing trade" interests me. Mainly because my brain is fixating on attempting to understand the use of the adjective uncrossing in the phrase!

I found few particularly useful articles online. But from here some more words about Auctions and a mention of UT, where the price seems to be the one in which "volume is maximised".

An auction consists of two phases; the Call Phase and the Price Determination Phase. During the call phase, orders can be entered, changed or cancelled, but no trades are completed. Essentially during the Call Phase, there is a call for orders. A preliminary indicative price is also found. The subsequent phase is the Price Determination phase. During this stage, no orders can be changed, entered or cancelled. An order-matching algorithm is run which seeks to find a price at which the executable volume is maximised. In other words, the price reached is the price at which the highest volume takes place. Other conditions are also sought after in the final price. A 'minimum surplus' and accurate 'market pressure' are two of these. The final auction price is displayed as an 'Uncrossing Trade' - UT.

thanks Matt

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Re: Croda (CRDA) shares trading in a Closing Auction Call

#214640

Postby Gengulphus » April 12th, 2019, 1:23 pm

TheMotorcycleBoy wrote:Wow those documents! I opened the first one, and noticed it was 98 pages long and nearly closed it there and then in horror! ...

Yes, I don't use phrasing like "(a lot of) detail" all that lightly! ;-) Though it's by no means an extreme case - a couple of days ago, a technical reference manual pdf I opened, mainly out of curiosity, turned out to be 7,476 pages long...

TheMotorcycleBoy wrote:I wish I'd screen shotted it now! I'm starting to query my exact memory now....I think it was say 5-10 minutes after 16:30 when I looked at the LSE page. And the reason why I mentioned 16:15 - 16:30 was purely because when I squinted at the day's screen chart there was a flatline at about that time interval.

It has occurred to me since that you might have some cause for complaint about the "All data delayed by at least 15 minutes" wording on the page, since the data about the LSE status is not delayed. But that's pedantic enough that I wouldn't waste my time complaining about it! ;-)

TheMotorcycleBoy wrote:My main point of curiousity, was mainly to try to understand the auction was about. But now I discover they are actually commonplace. I'm going to try to read up some more about these, and also about the concept of "uncrossing trade" (UT) which seems to come up from time to time.

Basically, an auction is just what I described: a 'call period' in which orders are collected but not matched up with each other to produce trades, followed by a grand matching-up at the end.

During normal trading, if there's a buy order and a sell order for which there's a mutually agreeable price, a trade becomes agreed immediately and at least one of the two orders (both if they're for the same number of shares) vanishes from the order book. That happens whenever either of those orders is an 'at best' order, or if both are limit orders and the buy's limit price is >= the sell's limit price. So normally the 'bid' price, which is the largest limit price for any buy order on the order book, is always less than the 'ask' or 'offer' price, which is the smallest limit price for any sell order on the order book. Note incidentally that all orders actually on the order book do have limit prices - an 'at best' order is always matched immediately (or rejected because there are no orders at all that it can match), so don't get on to the order book.

During an auction call period, however, that normal matching of orders is suspended and so it becomes possible for the 'bid' price to become >= the 'ask' or 'offer' price. That state of the two prices being what would normally be the 'wrong way around' is known as the market being 'crossed' - a reasonably natural term IMHO. If the market is crossed at the end of that period, then there is a mutually-agreeable price at which some trades can be done, and a price is chosen and a trade done at that price so that as many shares as possible are traded, after which the market is no longer crossed - and so the trade concerned is known as the 'uncrossing trade'. (If the market isn't crossed at the end of the call period, that means that no buyer is willing to pay as much as even the lowest seller wants, so there is no mutually-agreeable price for a trade, and so no uncrossing trade happens.)

The uncrossing trade is done as a single trade to get a single price out of the process (*) - a major purpose of the opening and closing auctions is to set the official 'open' and 'close' prices for the share, and there's a similar purpose about option expiries for some other auctions. There always is a fairly easily-calculated maximum number of shares that can be traded, because as the price being considered rises from lower than any order specifies to higher than any order specifies, the number of shares that can be sold at that price rises from zero to the total number being offered in sell orders, always rising or remaining the same during the process, and similarly the number of shares that can be bought at that price falls from the total number being bid for in buy orders to zero, always falling or remaining the same during the process. The number of shares that can be traded at a price is just the lesser of those two numbers, so it starts at zero, then rises or remains the same until the number of shares that can be sold at that price rises above the number that can be bought at that price, after which it switches over to falling or remaining the same until it reaches zero again. So the number of shares that can be traded reaches a maximum at the switchover point.

Unfortunately, that often isn't enough to determine the price at which that number of shares can be traded. Even in as simple a case as there being a buy order for 1000 shares at 30p and a sell order for 1000 shares at 20p, it ends up giving a range of prices: 0 shares can be traded at prices below 20p or above 30p, 1000 shares at any price from 20p to 30p. So the LSE's order book system has a number of tiebreakers to resolve the price within that range for the uncrossing trade in such cases. AFAIAA, the bit saying "Other conditions are also sought after in the final price. A 'minimum surplus' and accurate 'market pressure' are two of these." in the quote you found (in a later post than the one I'm replying to) is about those tiebreakers - i.e. the real driver for the uncrossing trade decision is just the maximum-volume-traded condition, with the other conditions only being used to resolve cases that it fails to make a choice between.

(*) And I believe also in order to avoid having to make arbitrary decisions about how to split it up into individual trades - even as simple an outcome as buyers A and B buying 1000 shares each and sellers C and D selling 1000 shares each can be split up into individual trades as C sells n shares to A and 1000-n shares to B, while D sells 1000-n shares to A and n shares to B, in 1001 different ways - one for each value of n from 0 to 1000. And the numbers of ways it can be done quickly become astronomical as the numbers of buyers and sellers rise.

TheMotorcycleBoy wrote:
Gengulphus wrote:As regards the "off book" question, I believe that means that the trade was executed elsewhere than on the LSE's order book system, such as on the RSP network, but reported through the LSE's trade reporting system. The RSP network is incidentally the trading system that executes orders by the 'give a quote, you get 15 seconds to accept it or it expires' method you're probably familiar with. The LSE's order book system isn't capable of that - which is the source of quite a bit of confusion among private investors who somewhat naïvely think that they're dealing with the LSE when they trade their shares. For instance, if they try to trade fewer shares than the number market makers are obliged to keep quotes for and it still fails, or they have a limit order in

So since I do almost all my buying now by setting limit orders, do they still use the 'give a quote, you get 15 seconds to accept it or it expires', behind the scenes? But of course with the software doing the virtual mouse click for the yes "Accept the quote and buy" bit?

Not a question I can answer, beyond saying that I think it depends on the broker. I think from looking at what has happened with some large orders for smallcap shares that the answer for one broker I've used is "yes, their system just monitored the bid/offer prices until they indicated that my limit price was achievable, then tried to execute the order on the RSP network" and for another broker I use that it's "Maybe as a first resort, but they fall back on another execution method if that fails - and possibly have more than one such fallback method". But I'm not certain of any of that - e.g. the first broker might not have been using the RSP network, but instead an LSE 'fill or kill' order (which like an 'at best' order either executes immediately or is rejected, but unlike it has a limit price). The only way I can think of for resolving such questions for certain is to ask the broker for details of how they go about executing orders - and I'm neither certain that one will get an answer to such a question, nor that if one does, it won't be one along "this is what we currently do, but we keep our execution policy under continuous review, might change it in accordance with market developments at any time, and frequently do" lines. And I've never asked a broker such a question myself - I find judging brokers by results far easier, and the only reasons I know what I do is past curiosity about how the market works and what the explanations are for some odd-looking events people have described in posts.

One aside to the above: you might correctly deduce from the tenses I've used in the above that I no longer use the first broker and do still use the second, but incorrectly deduce that I left the first because of how they dealt with large orders for smallcap shares. In fact, I only stopped using them for smallcaps - I still used them for HYP shares and a few other largecap shares. The fact that I no longer use them at all is because about 10 years ago, they decided to leave the cheap online broker business.

Gengulphus


Moderator Message:
edited by me at G's request to fix an error in bid - ask - offer terminology, dspp @ 15:45 on 15 04 2019

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Re: Croda (CRDA) shares trading in a Closing Auction Call

#215147

Postby TheMotorcycleBoy » April 15th, 2019, 12:20 pm

Hi Geng,

Sorry I've taken a while in replying. I've been feeling a little bit fluish over the past couple of days and all I've really been fit to do on TLF is reply to the ongoing Brexit threads. Sad, I know....

Gengulphus wrote:During an auction call period, however, that normal matching of orders is suspended and so it becomes possible for the 'ask' or 'bid' price to become >= the 'offer' price. That state of the two prices being what would normally be the 'wrong way around' is known as the market being 'crossed' - a reasonably natural term IMHO. If the market is crossed at the end of that period, then there is a mutually-agreeable price at which some trades can be done, and a price is chosen and a trade done at that price so that as many shares as possible are traded, after which the market is no longer crossed - and so the trade concerned is known as the 'uncrossing trade'. (If the market isn't crossed at the end of the call period, that means that no buyer is willing to pay as much as even the lowest seller wants, so there is no mutually-agreeable price for a trade, and so no uncrossing trade happens.)

Thanks for trying to help me with the "crossed" trade description, your 'being the wrong way around' analogy does help a little. But when you stated:

the 'ask' or 'bid' price to become >= the 'offer' price

that did puzzle me a little because you've used (what I believe are the two opposing price levels published by an MM, market maker) ask and bid on the same side of the inequality.

So perhaps part of my (earlier?) confusion resulted from my sluggishness in grasping the concepts of ask and bid from the different players (buyers, sellers, MMs) involved in a stock market. I spent some more time online researching and looking at a stock and I'm now viewing things as would be, through the eyes of an MM, for example:

MM 'ask'/sell 27  "I'll sell to you at $27"
'bid'/buy 24 "I'll buy from you at $24"

So assuming that if we have an auction and following requests are made

BUYERS @         SELLERS @
$28 $26
$27 $25
$26 $24
$25 $23

Then the buyers at $26, $25, and the sellers at $25 and $26 represent the crossed trades? I'm basing this conclusion on this sentence A crossed market order occurs when a bid price exceeds an ask price resulting in unfavorable terms for the market maker which I extracted a previous link.

I've read the later parts of your last post, but I decided that I needed to get the whole of concept of crossed and uncrossed trades (and markets apparently!) clear before proceeding much further!

many thanks,
Matt

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Re: Croda (CRDA) shares trading in a Closing Auction Call

#215164

Postby Gengulphus » April 15th, 2019, 1:18 pm

Sorry! I normally think in terms of 'bid' and 'offer' prices, together making up the 'bid/offer spread', and very rarely in terms of 'ask' prices, and I somehow had wires crossed in my head when I wrote that earlier post, about which of 'bid price' and 'offer price' 'ask price' was synonymous with. You're quite right that it's 'offer price', not 'bid price', so basically read each occurrence of "'ask' or 'bid' price" in that post as "'bid' price", and each occurrence of "'offer' price" as "'ask' or 'offer' price". It may well change to actually say that at some point, as I'll report it to ask a moderator to edit it in that way.

I should be more careful about using technical terminology I'm not all that familiar with...

Gengulphus

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Re: Croda (CRDA) shares trading in a Closing Auction Call

#215170

Postby simoan » April 15th, 2019, 1:36 pm

TheMotorcycleBoy wrote:Sorry I've taken a while in replying. I've been feeling a little bit fluish over the past couple of days and all I've really been fit to do on TLF is reply to the ongoing Brexit threads. Sad, I know....

Well, I couldn't imagine anything worse - discussing Brexit that is, I'd much rather have the flu... but both together! :(

Hopefully you'll recover soon (from both).
All the best, Si

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Re: Croda (CRDA) shares trading in a Closing Auction Call

#215214

Postby TheMotorcycleBoy » April 15th, 2019, 3:58 pm

Gengulphus wrote:Sorry! I normally think in terms of 'bid' and 'offer' prices, together making up the 'bid/offer spread', and very rarely in terms of 'ask' prices, and I somehow had wires crossed in my head when I wrote that earlier post, about which of 'bid price' and 'offer price' 'ask price' was synonymous with. You're quite right that it's 'offer price', not 'bid price', so basically read each occurrence of "'ask' or 'bid' price" in that post as "'bid' price", and each occurrence of "'offer' price" as "'ask' or 'offer' price". It may well change to actually say that at some point, as I'll report it to ask a moderator to edit it in that way.

I should be more careful about using technical terminology I'm not all that familiar with...

Gengulphus

Don't worry about the typo! Glad I got the terminology figured out...

So it what I wrote earlier, i.e.
MM 'ask'/sell 27  "I'll sell to you at $27"
'bid'/buy 24 "I'll buy from you at $24"

So assuming that if we have an auction and following requests are made

BUYERS @         SELLERS @
$28 $26
$27 $25
$26 $24
$25 $23

Then the buyers at $26, $25, and the sellers at $25 and $26 represent the crossed trades?

still correct, i.e. my mental grappling at an illustration of crossed trades?

Matt

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Re: Croda (CRDA) shares trading in a Closing Auction Call

#215601

Postby Gengulphus » April 17th, 2019, 10:28 am

TheMotorcycleBoy wrote:So it what I wrote earlier, i.e.
MM 'ask'/sell 27  "I'll sell to you at $27"
'bid'/buy 24 "I'll buy from you at $24"

So assuming that if we have an auction and following requests are made

BUYERS @         SELLERS @
$28 $26
$27 $25
$26 $24
$25 $23

Then the buyers at $26, $25, and the sellers at $25 and $26 represent the crossed trades?

still correct, i.e. my mental grappling at an illustration of crossed trades?

No, I'm afraid not. That's for two reasons: first, I suspect you've said "buyers" when you mean "sellers" and vice versa. Secondly, a major part of the purpose of an auction is to arrive at a single price: one cannot find a single price at which all the buyers and sellers are willing to trade (as you've actually stated the order book position at the point that uncrossing is about to happen) or at which all the $25 and $26 buyers and sellers are willing to trade (as I suspect you intended to state it). There is also the issue that each order has a number of shares wanted / on offer, and the numbers can affect the result of the auction: I assume that you intend all of the orders in your example to be for the same number of shares, which I'll take to be 100 in what follows.

So let's look at the position for the buy orders, as you've actually stated it:


The last column says for instance that there are buyers for 200 shares at $27, since there are buyers for 100 shares who are willing to pay anything up to $28, and for a further 100 shares who are willing to pay anything up to $27. It's calculated simply as the cumulative sum of the preceding column, from the bottom up and with that sum starting at 0 shares for prices above $28.

And one can take a similar look at the sell orders, to get at the numbers of shares available for purchase at each price. The main difference is that the cumulative sum is done from the top down and with it starting at 0 shares for prices below $23 - that's because while buy limits say "willing to buy at this price or less", sell limits say "willing to sell at this price or more":


Now merge the two tables, extended with zeros and extra cumulative sums to make them cover the same price range, and with an extra "Shares tradable at price" column which is just the lesser of the number of shares available for purchase at the price and the number of shares there are buyers for at the price. I'll do this with the shared price column at the left, the other columns from the second table reversed left-right and the extra column between them and emboldened - this basically to make the flow of the calculation towards the extra column as visible as possible:


So the maximum number of shares tradable is 300, and that number of shares can be traded at $25, $26 or any price between those (e.g. at $25.5, there would be buyers for 300 shares and 300 shares available for purchase). Exactly which price within that $25-$26 range would be chosen for the uncrossing trade would be determined by the LSE's tie-breaking rules, which I don't know offhand but will be somewhere in the mass of LSE technical documentation if one cares enough to bother looking (which I don't! - I've seen them once, many years ago, but all that sticks in my memory is the fact that they exist).

If the price chosen is $25, there is the issue that there are buyers for 400 shares at that price but only 300 shares traded - which of them gets satisfied? IIRC, that gets settled by the LSE's general priority rules that buy orders with more competitive (i.e. higher for buy orders) limit prices have priority over those with lower limit prices, and between buy orders with the same limit price, the one that was entered into the system earlier gets priority. There's a similar situation for the sell orders if the price chosen is $26, and it's resolved similarly, with the only difference being that the more competitive limit prices are the lower ones. Regardless of whether the price chosen is $25, $26 or something inbetween, however, it always works out that all the buyers with limit prices of $26, $27 and $28 and all the sellers with limit prices of $23, $24 and $25 have their orders satisfied by the uncrossing trade, and afterwards the buy order with limit $25 and the sell order with limit $26 are left on the now-uncrossed order book.

Note by the way that even quite small changes to the numbers of shares people want to trade can get rid of the need for the tiebreakers to be used. For instance, if the buy order(s) whose limit price is/are $26 are for a total of 101 shares rather than 100, the calculation becomes:


and now the uncrossing price is $26 without any need for tiebreakers, all buyers with limits of $26, $27 and $28 and all sellers with limits of $23, $24 and $25 have their orders fully satisfied, and the seller with limit $26 whose order was entered first gets it partially satisfied to the extent of 1 share - unlike the normal situation we see with online brokers, LSE order book orders aren't all-or-nothing affairs. (At least by default - I think I saw something about an option for an order to say "satisfy me entirely or not at all" years ago, but have no idea whether it still exists or if it does, what restrictions there might be on its use or how it affects trade-matching, either in normal trading or in auctions.)

As I said at the start of this, I suspect you intended the lists of buy and sell order limit prices to be the other way around - that results in the following calculation:


So in that case, the uncrossing trade is for 100 shares, at a price in the range $25-$26 that is resolved by the LSE's tiebreaking rules. Regardless of exactly what the uncrossing price is within that range, the buy orders with limit $26 and the sell orders with limit $25 are all satisfied, leaving the uncrossed order book containing the buy orders with limits of $23, $24 and $25 and the sell orders with limits of $26, $27 and $28.

Finally, I've followed your lead by using dollar-denominated share prices, but one can replace $ by £ throughout the above to get examples that are rather more relevant to most trading on the LSE - or even multiply all the share counts by 100 and change the prices from pounds to pence! ;-)

Gengulphus

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Re: Croda (CRDA) shares trading in a Closing Auction Call

#215607

Postby TheMotorcycleBoy » April 17th, 2019, 10:55 am

Your example above is fantastic Geng! I'm slowly working through it whilst waiting for tasks to complete at my day-job.

When you said this:
I suspect you've said "buyers" when you mean "sellers" and vice versa.

it's basically due my original example being a little unclear, perhaps.

I'll try to post back properly in a couple of days. But as I read more of your words I can tell that the penny is dropping. :)

thanks again,
Matt

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Re: Croda (CRDA) shares trading in a Closing Auction Call

#216242

Postby TheMotorcycleBoy » April 19th, 2019, 5:33 pm

Hi Geng,

I'm taking another look at this. Actually when I said Then the buyers at $26, $25, and the sellers at $25 and $26 represent the crossed trades? I did mean just that. But perhaps I got things horribly wrong. May I elaborate? I meant the implied trades which I've marked with asterisks right here:

BUYERS @         SELLERS @
$28 $26 *
$27 $25 *
* $26 $24
* $25 $23

I believe (probably incorrectly!!) that they are crossed based on this a bid price exceeds an ask price resulting in unfavorable terms for the market maker, since in the introductory part of my earlier post I asserted:

MM 'ask'/sell 27  "I'll sell to you at $27"
'bid'/buy 24 "I'll buy from you at $24"


i.e. I assumed a single market maker for the above shares, who is willing to trade at $24-$27 (sorry I like using $ not £ because I'm a programmer by trade, and we sometimes use $ to prefix shell variables, also a lot my investment books use them, so as I result I find that key much easier to hit in hurry!!). So that's why I previously had asserted those (implied) trades (well requests to trade, I guess) as crossed. Since they would represent an unnatural (crossed?) trade because they'd force the MM into a loss making predicament, since he'll only buy (therefore accept a seller) at $24 and he'll only sell (accept a buyer) at $27. Sorry if I'm hopelessly wrong and confusing as a result!! Still very much finding my way...

Gengulphus wrote:So let's look at the position for the buy orders, as you've actually stated it:


The last column says for instance that there are buyers for 200 shares at $27, since there are buyers for 100 shares who are willing to pay anything up to $28, and for a further 100 shares who are willing to pay anything up to $27. It's calculated simply as the cumulative sum of the preceding column, from the bottom up and with that sum starting at 0 shares for prices above $28.

And one can take a similar look at the sell orders, to get at the numbers of shares available for purchase at each price. The main difference is that the cumulative sum is done from the top down and with it starting at 0 shares for prices below $23 - that's because while buy limits say "willing to buy at this price or less", sell limits say "willing to sell at this price or more":


Now merge the two tables, extended with zeros and extra cumulative sums to make them cover the same price range, and with an extra "Shares tradable at price" column which is just the lesser of the number of shares available for purchase at the price and the number of shares there are buyers for at the price. I'll do this with the shared price column at the left, the other columns from the second table reversed left-right and the extra column between them and emboldened - this basically to make the flow of the calculation towards the extra column as visible as possible:


Thanks. Yes I can see how the middle column (number tradeable) is deduced using the minima of the adjacent cells on that row. It's analogous to many physical scenarios of flow. And yes we seek to find the row where this minima is at it's greatest value.

And likewise the tie-breaker and "tweak to the order size bit, i.e. to 101" make complete sense.

Gengulphus wrote:As I said at the start of this, I suspect you intended the lists of buy and sell order limit prices to be the other way around..

No, to be honest, it really was as indicated in the above. I was pretty clear the "uncrossing trade which maximises trading volume", though your tabular examples do illustrate and help reinforce this quite brilliantly.

What I really wanted to see, and I'm still puzzled with regards, in terms of buyers, sellers, market makers, prices and volumes, is what a crossed trade looks like. And my earlier example (that is the scenario which I tried to elaborate earlier with asterisks) was merely a vain attempt of mine to illustrate your previous description of two prices being what would normally be the 'wrong way around' is known as the market being 'crossed' .

Gengulphus wrote:Finally, I've followed your lead by using dollar-denominated share prices, but one can replace $ by £ throughout the above to get examples that are rather more relevant to most trading on the LSE - or even multiply all the share counts by 100 and change the prices from pounds to pence! ;-)

Of course! Like I said earlier I have a somewhat lame excuse for using $! Since we are in England I should refrain!

Many thanks
Matt

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Re: Croda (CRDA) shares trading in a Closing Auction Call

#216339

Postby Gengulphus » April 20th, 2019, 12:51 pm

TheMotorcycleBoy wrote:I'm taking another look at this. Actually when I said Then the buyers at $26, $25, and the sellers at $25 and $26 represent the crossed trades? I did mean just that. But perhaps I got things horribly wrong. May I elaborate? I meant the implied trades which I've marked with asterisks right here:

BUYERS @         SELLERS @
$28 $26 *
$27 $25 *
* $26 $24
* $25 $23

I believe (probably incorrectly!!) that they are crossed based on this a bid price exceeds an ask price resulting in unfavorable terms for the market maker, since in the introductory part of my earlier post I asserted:

I don't think there is any such thing as a "crossed trade"! It doesn't really make sense as a concept, because a trade happens at a single price, not at two prices that could be in the 'wrong' order... Being "crossed" is a property of the market, not of any of the trades it produces. And there isn't any occurrence of "crossed trade" in your Investopedia link - every single occurrence of "crossed" in it is followed by "market".

In a number of cases, it's then followed by "order", to produce the phrase "crossed market order". At first, that struck me as not making sense either, because an order put into the stockmarket has either a single price associated with it (for limit orders, fill-or-kill orders, and the like) or none (for 'at best' orders and some other types I haven't mentioned (*)) - not two that could be in the 'wrong' order. But on thinking about it, I believe the "order" in their use of "crossed market order" should be interpreted as meaning a mathematical <, = or > relationship (as it does when I say "the 'wrong' order", for example) rather than as an instruction attempting to buy or sell shares submitted to the stockmarket's order book system. The former fits in with the context of it talking about bid prices exceeding ask prices, whereas the latter doesn't. Not the best-worded Investopedia definition I've ever seen... It would I think be improved by changing "crossed market order" to "crossed market ordering", though that's not ideal either, if only because of clumsiness!

I will also note that market makers have little special role (if any) in the LSE's order book system. Their main special role is to do with telephone trading: they're obliged to quote if someone phones them up during market hours and asks for a quote for a number of shares that doesn't exceed what used to be called the share's NMS (which I think stood for Normal Market Size, and I believe it's been replaced by some other TLA in the large number of years since I last went into the details, but don't offhand remember what the TLA is). They don't have any such obligation with regard to the RSP network, which as I said is what handles the "quote valid for 15 seconds" system that is used for most individual investor trading. They did have an obligation to maintain quotes during market hours for buys and sells of at least that size on a variant of the LSE's order book system called SETSmm (no prizes for guessing what the "mm" stood for!), which was used to bring a lot of less liquid shares into the order book system - basically as a countermeasure to the weakness of electronic order book systems that they don't function well when the order book is empty or nearly empty. I'm not certain how relevant that still is, or even whether it was ever relevant to auctions (depends on the exact legal phrasing of the 'during market hours' restriction on that obligation, which I don't know). But whatever the exact situation is in that respect, orders from market makers in the LSE's order book system are AFAIAA treated just like orders from any other market participant who can place orders in it when matching orders: the market maker obligation is at most relevant to whether orders exist at all, not to how the orders that do exist are matched up to form agreed trades.

What that all means is that when you asked about the "crossed trades", followed by lists of prices attributed to "BUYERS" and "SELLERS", I took what you were saying to be about the buy orders and sell orders on the order book, and never even thought of the possibility that you were thinking in terms of there being a third-party market maker involved (yes, I'm afraid I failed to spot your "MM" at its start...). And the only interpretation I could see of those orders being "crossed" was that they were orders that could be matched with an order of the opposite type on the order book to form an agreed trade, and would be thus matched if normal trade matching were being done during an auction. So they were the buy orders with a limit price >= the lowest limit price of a sell order, and the sell orders with a limit price <= the highest limit price of a buy order. But that would result in you putting an asterisk against every order you listed - while if you'd inadvertently got the two lists labelled the wrong way around, you would have put asterisks against the orders you did.

Anyway, clearly I didn't get that right - sorry! But in the light of what I say above about there being no such thing as a "crossed trade" and market makers basically being irrelevant to how an auction arrives at the uncrossing price, I think the only other answer I could have given is basically "Your question doesn't make sense to me!" - which would be very unhelpful without an explanation of why it doesn't make sense to me... Hence the above explanation.

(*) Just to add to the possible confusion, those types include a type the LSE calls a 'market order'! (No guarantees that any other stockmarket does the same, or even has an equivalent order type - and note that Investopedia is primarily US-oriented, as evidenced by their examples "NYSE, Nasdaq, ARCA, AMEX and CBSX" of stock exchanges.) I haven't mentioned it before because market orders are of little relevance to anything I've said, but it's an order type that can only be entered during an auction (or possibly can be entered before one but only becomes active when the auction starts - I don't remember that detail), expires at the end of the auction if it hasn't been filled, and has no limit price - it basically says "I'm willing to trade at whatever price the auction settles on". I think it's basically dealt with at the end of the auction by starting the cumulative sum of the shares that there are buyers for (for buy orders) or that are available for purchase (for sell orders) at the sum of the numbers of shares subject to market orders of that type rather than at zero.

TheMotorcycleBoy wrote:
MM 'ask'/sell 27  "I'll sell to you at $27"
'bid'/buy 24 "I'll buy from you at $24"

i.e. I assumed a single market maker for the above shares, who is willing to trade at $24-$27 (sorry I like using $ not £ because I'm a programmer by trade, and we sometimes use $ to prefix shell variables, also a lot my investment books use them, so as I result I find that key much easier to hit in hurry!!). So that's why I previously had asserted those (implied) trades (well requests to trade, I guess) as crossed. Since they would represent an unnatural (crossed?) trade because they'd force the MM into a loss making predicament, since he'll only buy (therefore accept a seller) at $24 and he'll only sell (accept a buyer) at $27. Sorry if I'm hopelessly wrong and confusing as a result!! Still very much finding my way...

Eh? It's only loss-making to buy a share for $24 and sell it on for $27 if your overheads for providing the service (i.e. making it possible to trade the shares on demand during market hours) are over $3 per share! That's one of the basic reasons why less liquid shares generally have bigger spreads - there are much better economies of scale on overheads per share traded for the more liquid shares.

The other is competition between market makers and others who choose to provide a similar service (such as RSP providers) to get a good 'market share' - i.e. a high fraction of the shares being traded - because you only get the economies of scale on the number of shares that go through your hands rather than the competition's. If you're quoting to sell shares to all comers at $27 and another market maker is quoting to sell them to all comers at $26, guess who gets most of the business! Having said that, there's also a need for market makers to end up with a 'balanced book' - if they sell a lot more shares than they buy, they'll end up with a substantial net short position on the shares, making them horribly vulnerable to the share price rising: to counteract that, the market maker might well deliberately become uncompetitive on selling shares to others and concentrate on being competitive on buying shares from others for a while. So it's perfectly conceivable for example that three market makers' quoted spreads are $23/$26, $24/$27 and $25/$28 respectively - that probably means that the first has a somewhat worryingly large net long position and so wants to sell more shares much more than they want to buy more shares, the third has a somewhat worryingly large net short position and so wants exactly the opposite, and the second has a roughly-zero net position, would probably like to be highly competitive about getting both buys and sells, but not at the expense of quoting $25/$26 and so only even trying for a pre-overheads profit of $1 rather than $3. So instead, they settle for being in the second most-competitive on both buys and sells.

For the LSE's order book system, by the way, "market makers and others who choose to provide a similar service" in that last paragraph basically includes anyone, market maker or not, who chooses to simultaneously have a sell limit order and a buy limit order for the same share on the system, with prices chosen with sell limit > buy limit and to make it reasonably likely that at least one of them will be filled reasonably quickly, and to habitually maintain such orders on the system. Anyone who can get direct access to the system can set up to do so if they like, provided only that the terms & conditions of whoever supplies their access don't forbid behaving in that way. (Though as a cautionary note, as you might gather from the above, making a success of doing it is a rather tricky balancing act - not to be undertaken lightly under the naïve impression that it's the route to easy wealth!)

As indicated above, I'm uncertain to what extent, if any, the market makers are obliged to put their quotes on the LSE's order book system. But in my example above, I would normally expect the first market maker to put at least an order to buy at $25 on it and the third to put at least an order to sell at $26 on it - there's no real point in them forgoing an additional possibility of correcting their overstretched positions. And I think the second would probably put orders to buy at $24 and sell at $27 on it - there are possibilities of either getting filled, such as if there's a flurry of 'at best' sell orders that clear out the $25 buyers and start to match the $24 buyers. (Even if the $25 buyers automate a decision to place another $25 buy order and do so in a small fraction of a second, the LSE systems are likely to have matched the $24 buyers in an even smaller fraction of a second...)

So the spread quoted by the LSE will very likely be $25/$26 (or better - someone with direct access who isn't a market maker but non-urgently wants to try to buy at a price a bit better than $26 might for instance put in a $25.25 buy order) even though no market maker or similar is offering a spread as small as $1.

TheMotorcycleBoy wrote:What I really wanted to see, and I'm still puzzled with regards, in terms of buyers, sellers, market makers, prices and volumes, is what a crossed trade looks like. ...

As hopefully adequately explained above, I don't believe it looks like anything! Someone somewhere might have some concept that they choose to describe as a "crossed trade", but I don't have any hope of explaining any such concept without at least seeing a case where they've used it - and that might well not be enough: I've seen an awful lot of totally confused gobbledygook about technical matters over the years!

Gengulphus

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Re: Croda (CRDA) shares trading in a Closing Auction Call

#216358

Postby Lootman » April 20th, 2019, 2:51 pm

Gengulphus wrote:
TheMotorcycleBoy wrote:What I really wanted to see, and I'm still puzzled with regards, in terms of buyers, sellers, market makers, prices and volumes, is what a crossed trade looks like.

As hopefully adequately explained above, I don't believe it looks like anything! Someone somewhere might have some concept that they choose to describe as a "crossed trade", but I don't have any hope of explaining any such concept without at least seeing a case where they've used it - and that might well not be enough: I've seen an awful lot of totally confused gobbledygook about technical matters over the years!

Back when I worked for a broker, the only use of the term "crossed trade" that I was familiar with was a case where the same entity (say, a fund manager) would be buying a particular share from one account/fund and at the same time selling it from another. In such a case the fund manager does not need to go to the market or exchange at all, but rather just engaged in an internal bookkeeping transaction to move the shares from one account to another. In fact this was also called an "internal cross".

The large fund managers, like Blackrock, Vanguard and Fidelity, can accordingly execute quite a high proportion of their trades via crossing trades, saving themselves commissions and the bid-to-offer spread. As best I recall the cross is done at the mid-price. You can imagine this happening when a share is promoted or relegated from one index to another, for instance. Or with active managers within the house who are taking different views of the same share.

I do not know what the term means in any other context.

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Re: Croda (CRDA) shares trading in a Closing Auction Call

#216388

Postby TheMotorcycleBoy » April 20th, 2019, 5:43 pm

Gengulphus wrote:I don't think there is any such thing as a "crossed trade"!

Funnily enough apparently there is!!. Though it could be agreed between you and I this not to be germane to our subject matter.

Perhaps what investopedia in that link I just placed above, is what Lootman referred to here:
Lootman wrote:Back when I worked for a broker, the only use of the term "crossed trade" that I was familiar with was a case where the same entity (say, a fund manager) would be buying a particular share from one account/fund and at the same time selling it from another. In such a case the fund manager does not need to go to the market or exchange at all, but rather just engaged in an internal bookkeeping transaction to move the shares from one account to another. In fact this was also called an "internal cross".

The large fund managers, like Blackrock, Vanguard and Fidelity, can accordingly execute quite a high proportion of their trades via crossing trades, saving themselves commissions and the bid-to-offer spread. As best I recall the cross is done at the mid-price. You can imagine this happening when a share is promoted or relegated from one index to another, for instance. Or with active managers within the house who are taking different views of the same share.


Gengulphus wrote:It doesn't really make sense as a concept, because a trade happens at a single price, not at two prices that could be in the 'wrong' order... Being "crossed" is a property of the market, not of any of the trades it produces. And there isn't any occurrence of "crossed trade" in your Investopedia link - every single occurrence of "crossed" in it is followed by "market".

I agree. In our discussion (i.e. prior to LM's post arriving on the scene) we are talking "crossed market" not "crossed trade", since there would be no opposite party in the crossed market case, hence no trade.
Gengulphus wrote:Anyway, clearly I didn't get that right - sorry! But in the light of what I say above about there being no such thing as a "crossed trade" and market makers basically being irrelevant to how an auction arrives at the uncrossing price, I think the only other answer I could have given is basically "Your question doesn't make sense to me!" - which would be very unhelpful without an explanation of why it doesn't make sense to me...

No worries. Sometimes I can be both tenacious and confusing in equal measure!

Gengulphus wrote:
TheMotorcycleBoy wrote:
MM 'ask'/sell 27  "I'll sell to you at $27"
'bid'/buy 24 "I'll buy from you at $24"

i.e. I assumed a single market maker for the above shares, who is willing to trade at $24-$27 (sorry I like using $ not £ because I'm a programmer by trade, and we sometimes use $ to prefix shell variables, also a lot my investment books use them, so as I result I find that key much easier to hit in hurry!!). So that's why I previously had asserted those (implied) trades (well requests to trade, I guess) as crossed. Since they would represent an unnatural (crossed?) trade because they'd force the MM into a loss making predicament, since he'll only buy (therefore accept a seller) at $24 and he'll only sell (accept a buyer) at $27. Sorry if I'm hopelessly wrong and confusing as a result!! Still very much finding my way...

Eh? It's only loss-making to buy a share for $24 and sell it on for $27 if your overheads for providing the service (i.e. making it possible to trade the shares on demand during market hours) are over $3 per share!

Ha ha! Sorry they were just numbers that I pulled out of the air. Anyway the fat spread made it easier to use small whole numbers for other parts of my example.

Gengulphus wrote:That's one of the basic reasons why less liquid shares generally have bigger spreads - there are much better economies of scale on overheads per share traded for the more liquid shares.

Alas yes! Why I always struggle to get a limit buy for some of our AIM shares to execute!

Gengulphus wrote:The other is competition between market makers and others who choose to provide a similar service (such as RSP providers) to get a good 'market share' - i.e. a high fraction of the shares being traded - because you only get the economies of scale on the number of shares that go through your hands rather than the competition's. If you're quoting to sell shares to all comers at $27 and another market maker is quoting to sell them to all comers at $26, guess who gets most of the business! Having said that, there's also a need for market makers to end up with a 'balanced book' - if they sell a lot more shares than they buy, they'll end up with a substantial net short position on the shares, making them horribly vulnerable to the share price rising: to counteract that, the market maker might well deliberately become uncompetitive on selling shares to others and concentrate on being competitive on buying shares from others for a while. So it's perfectly conceivable for example that three market makers' quoted spreads are $23/$26, $24/$27 and $25/$28 respectively - that probably means that the first has a somewhat worryingly large net long position and so wants to sell more shares much more than they want to buy more shares, the third has a somewhat worryingly large net short position and so wants exactly the opposite, and the second has a roughly-zero net position, would probably like to be highly competitive about getting both buys and sells, but not at the expense of quoting $25/$26 and so only even trying for a pre-overheads profit of $1 rather than $3. So instead, they settle for being in the second most-competitive on both buys and sells.

Ah ha! Yes being a market maker is not for the faint hearted.

As indicated above, I'm uncertain to what extent, if any, the market makers are obliged to put their quotes on the LSE's order book system. But in my example above, I would normally expect the first market maker to put at least an order to buy at $25 on it and the third to put at least an order to sell at $26 on it - there's no real point in them forgoing an additional possibility of correcting their overstretched positions. And I think the second would probably put orders to buy at $24 and sell at $27 on it - there are possibilities of either getting filled, such as if there's a flurry of 'at best' sell orders that clear out the $25 buyers and start to match the $24 buyers. (Even if the $25 buyers automate a decision to place another $25 buy order and do so in a small fraction of a second, the LSE systems are likely to have matched the $24 buyers in an even smaller fraction of a second...)

So the spread quoted by the LSE will very likely be $25/$26 (or better - someone with direct access who isn't a market maker but non-urgently wants to try to buy at a price a bit better than $26 might for instance put in a $25.25 buy order) even though no market maker or similar is offering a spread as small as $1.

I need to come back to this last one. I'm still unsure about "Best orders".

Many thanks,
Matt

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Re: Croda (CRDA) shares trading in a Closing Auction Call

#216399

Postby Gengulphus » April 20th, 2019, 6:45 pm

TheMotorcycleBoy wrote:I need to come back to this last one. I'm still unsure about "Best orders".

An 'at best' order (*) submitted to the LSE's order book system is one that says "fill me immediately at the best price(s) available on the opposite side of the order book" - i.e. if you're buying, at the lowest limit price(s) of the sell orders on the order book, and if you're selling, at the highest limit price(s) of the buy orders on the order book. The description is also sometimes used for orders to be executed immediately at the best price available on other systems, such as the RSP network, but those aren't really within the context of this discussion.

I should possibly clarify that I say "price(s)" because of the possibility of multiple part-fills of the order. E.g. suppose the highest buy limit price on the order book is 100p, with just one order to buy 400 shares at that price, and it's followed by a buy order to buy 200 shares at 99.5p and then an order to buy 1,000 shares at 99p. Then if an 'at best' sell order for 1,000 shares comes in, it will match the 400 available at 100p, the 200 available at 99.5p, and 400 of the shares available at 99p. (And that will result in three separate trading reports appearing on the LSE's trade-reporting system... Anyone who watches those trade reports with the naïve idea that one trade report = one successfully-attempted trade will see some apparently very confusing things happening!)

(*) The word 'at' is definitely part of the standard description - it's an 'at best' order, not a 'best' order. If by any chance you knew that and really did mean something other than 'at best' orders, sorry, but in that case I don't know what you're talking about!

Gengulphus

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Re: Croda (CRDA) shares trading in a Closing Auction Call

#216430

Postby TheMotorcycleBoy » April 20th, 2019, 10:36 pm

Gengulphus wrote:
TheMotorcycleBoy wrote:I need to come back to this last one. I'm still unsure about "Best orders".

An 'at best' order (*) submitted to the LSE's order book system is one that says "fill me immediately at the best price(s) available on the opposite side of the order book" - i.e. if you're buying, at the lowest limit price(s) of the sell orders on the order book, and if you're selling, at the highest limit price(s) of the buy orders on the order book. The description is also sometimes used for orders to be executed immediately at the best price available on other systems, such as the RSP network, but those aren't really within the context of this discussion.

Ah ha.... Thanks, I understand.

I assume then this is what occurs most of time when one selects the "Buy/sell this stock now" option on an online sharedealing platform, i.e. a "best" order is executed where possible.

(*) The word 'at' is definitely part of the standard description - it's an 'at best' order, not a 'best' order. If by any chance you knew that and really did mean something other than 'at best' orders, sorry, but in that case I don't know what you're talking about!

Sorry Geng, for the uninitiated investing is a terminology jungle!

Matt

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Re: Croda (CRDA) shares trading in a Closing Auction Call

#216876

Postby TheMotorcycleBoy » April 23rd, 2019, 6:03 pm

TheMotorcycleBoy wrote:
Gengulphus wrote:
TheMotorcycleBoy wrote:I need to come back to this last one. I'm still unsure about "Best orders".

An 'at best' order (*) submitted to the LSE's order book system is one that says "fill me immediately at the best price(s) available on the opposite side of the order book" - i.e. if you're buying, at the lowest limit price(s) of the sell orders on the order book, and if you're selling, at the highest limit price(s) of the buy orders on the order book. The description is also sometimes used for orders to be executed immediately at the best price available on other systems, such as the RSP network, but those aren't really within the context of this discussion.

Ah ha.... Thanks, I understand.

I assume then this is what occurs most of time when one selects the "Buy/sell this stock now" option on an online sharedealing platform, i.e. a "best" order is executed where possible.

(*) The word 'at' is definitely part of the standard description - it's an 'at best' order, not a 'best' order. If by any chance you knew that and really did mean something other than 'at best' orders, sorry, but in that case I don't know what you're talking about!

Sorry Geng, for the uninitiated investing is a terminology jungle!

Matt

Hi G,

So is an 'at best' order basically the same as a 'market order?'

https://www.investopedia.com/terms/m/marketorder.asp

Or

https://www.investopedia.com/terms/a/at-best.asp

I guess a 'market's order is the American version.

Matt


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