Trading Mechanisms¶
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Order Types: Stock exchanges offer various order types, including market orders (executed immediately at the current market price) and limit orders (executed when a specific price is reached). These order types help traders specify their desired execution parameters.
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Auction Mechanisms: Some exchanges use auction mechanisms for opening and closing trading sessions. For example, a call auction occurs at the beginning of the trading day to determine the opening prices of securities.
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Continuous Trading: In continuous trading, securities are traded throughout the trading session, with prices constantly adjusting based on supply and demand. This is the primary mode of trading on most stock exchanges.
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Specialized Markets: Stock exchanges may have specialized segments or markets, such as the derivatives market, bond market, or commodity market, each with its unique trading rules and mechanisms.
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Market Makers: Many exchanges have market maker programs where designated market makers provide liquidity by quoting bid and ask prices for specific securities. They help maintain orderly markets and reduce bid-ask spreads.
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Electronic Trading: With the advent of technology, most stock exchanges have adopted electronic trading platforms that enable fast and efficient order matching. Algorithmic trading and high-frequency trading are prevalent in these environments.
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Tick Size and Lot Size: Exchanges set tick sizes (minimum price increments) and lot sizes (minimum order sizes) for securities. These parameters can vary based on the security's price and trading volume.
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