Stock Market Trading Modalities: Auctions, Orders, and Takeovers
Stock Market Trading Modalities
Principal recruitment modalities:
General Pattern: The recruitment method used for most liquid securities. It’s applied to the majority of values listed on the SIBE. This type of contract allows for trading operations at any time between 9:00 AM and 5:30 PM.
Fixing: Specific contracts for less liquid securities (those with a low number of operations in the continuous trading session). In this case, values are maintained at auction throughout the session. All purchase and sales orders are grouped and executed at two specific times: 12:00 PM and 4:00 PM. These are the only times when share allocations occur. This method gathers purchase and sales orders at those two moments, aiming to reduce volatility by limiting fluctuations throughout the day.
Trading on the electronic market develops during the business day, following a specific operational outline (except for the physical segment). The basic scheme of operation is as follows:
Opening Auction: This takes place from 8:30 AM to 9:00 AM. The typical trading session begins with an auction where brokers can enter orders, but they are not executed. The system calculates and disseminates the real-time price at which trading would occur if procurement orders began at that time. At the end of the auction, an equilibrium price between supply and demand is reached, which becomes the opening price. In short, it’s an adjustment period where computers determine the price based on orders entered when the Exchange was closed.
Open Session: Also known as continuous recruitment. It takes place from 9:00 AM to 5:30 PM. During this period, orders can be made and executed at the price set by the open market rules, which generally prioritize price and time. Computerized orders are matched, and operations are executed.
Closing Auction: The session ends with a 5-minute auction, similar to the opening auction. The resulting price is the closing price of the session.
There are different types of orders:
Orders for the Best: These orders have no price limit, so they are executed at the best price offered by the market at the time of their introduction. If the best price does not have sufficient volume or securities to cover the entire proposal, it will be partially implemented.
Market Orders: Also without a price limit, these orders trade at the best price at the time of their introduction. Unlike the previous order type, if there are not enough securities to execute the order in its entirety at the best price, it will continue to execute at as many prices as necessary until the order is completed. This is known as “sweeping the market”.
Limit Orders: These orders establish a maximum purchase price and a minimum sale price. The advantage of such orders is that they limit the risk posed by changes in stock prices.
OPA: Public Offering of shares. The IPO market is a procedure where an investor publicly offers to buy shares at a price higher than the current price to acquire the number of shares needed to control the company. The CNMV approves the offer, and the stock price is then suspended. The bid can be either hostile or friendly.
- Friendly Takeover: When there is an agreement by the directors of both companies.
- Hostile Takeover: When there is no agreement between the directors of both companies.
Sometimes, an investor financially assists a company undergoing a hostile takeover attempt. This investor is called a White Knight due to the positive aspect of preserving the company’s freedom from an unwanted takeover.