A periodic call auction is a trading mechanism where buy and sell orders for securities are collected over a specific period and then matched at a single price at a predetermined time. This is different from continuous trading, where trades are executed immediately as orders are received.

How Periodic Call Auction Works:

1. Order Collection:
• During the call auction period, buy and sell orders are accumulated without being matched immediately.
2. Determining the Equilibrium Price:
• At the end of the call auction period, the orders are aggregated, and an equilibrium price is determined. This price is set at a level where the maximum number of shares can be traded.
3. Execution of Trades:
• All orders that can be matched at the equilibrium price are executed simultaneously.

Reasons for Using Periodic Call Auctions:

1. Price Discovery:
• Enhanced Price Discovery: By aggregating orders and determining a single equilibrium price, call auctions can provide a clearer picture of supply and demand, leading to better price discovery, especially for illiquid or less frequently traded stocks.
2. Reduced Volatility:
• Minimised Price Fluctuations: Call auctions can help reduce volatility by preventing sudden price movements that can occur in continuous trading. This is particularly beneficial for stocks that are susceptible to large price swings.
3. Improved Liquidity:
• Liquidity Concentration: For thinly traded stocks, periodic call auctions can concentrate liquidity at specific times, making it easier for buyers and sellers to find matching orders and execute trades.
4. Fairer Trading:
• Equal Participation: Call auctions to ensure that all market participants have an equal opportunity to place orders before the price is set, promoting a fairer trading environment.
5. Regulatory Compliance:
• Market Stability: Regulatory bodies may mandate call auctions for certain stocks or during specific periods (e.g., market opening, closing) to ensure market stability and protect investors.

Example of Use:

• Opening and Closing Auctions: Many stock exchanges use call auctions at the beginning and end of the trading day to set the opening and closing prices of stocks. This helps establish a fair market price based on accumulated orders.