This article covers:

• What are ‘Bid’ and ‘Offer’ Prices?

• The Opening and Closing Auctions on the ASX

• Explaining Large Differences in Bid and Offer Prices

• Placing Orders

At the beginning and end of every trading session, you may notice there is usually a significant difference in the prices being offered by buyers and sellers of shares. These prices are often much higher than, and much lower than the indicative opening or closing price shown on your screen.

However, when the opening or closing trade does go through, many of those orders are filled, and a significant volume of shares may be traded. These factors are all interrelated. It is part of an important stock market process that every investor should understand.

What are ‘Bid’ and ‘Offer’ Prices?

First things first, if you’re new to investing in shares, it’s probably a good thing we cover the basics.

A ‘Bid’ is the maximum price that a buyer is willing to pay to purchase shares in a stock.

The ‘Offer’ price, sometimes called the ‘Ask’ price, is the price at which the seller is offering to sell their shares.

During trading hours, when the bid price ‘meets’ the offer price, a trade is executed.

The Opening and Closing Auctions on the ASX

The majority of an ASX trading session allows buyers and sellers to trade at the prevailing market price.

But there are two important periods where ‘auctions’ dictate the price at which a trade on the ASX is executed.

One of these auctions is the first 10 minutes of the trading session. The other is the final 10 minutes of the trading day.

There is also the possibility of a third auction scenario during the middle of a trading session. This applies if a company releases a price-sensitive announcement during the session, or the stock goes into a trading halt, or the stock resumes trading.

During the opening and closing ASX auctions, all bids and offers are matched. An algorithm weighs up the total volume on the buy side, and the total volume on the sell side. Where there is an ‘overlap’, this is referred to as the ‘match’.

Those shares will be traded at the ‘auction’ price, which is based on the mid-point price taking into account the weight of shares that have matched on the buy and sell sides.

ASX Opening Auction

At 10am Sydney time, normal trading will commence on a staggered basis. The opening 10 minutes serve as an auction period, however, the auction for each stock will take place in groups. These groups are categorised alphabetically as shown below.

Bids and offers may be submitted into the market any time from 7am Sydney time.

The opening time for each of the below groups of stocks is randomly generated. It may occur up to 15 seconds either side of the times shown. Keep in mind, if a company submits a price-sensitive announcement shortly before the start of the trading day, the opening auction will be delayed.

Closing Auction

At 4pm Sydney time, the market will move into a second auction phase. The closing auction begins with a period called the Pre-CSPA (Closing Single Price Auction), which allows orders to be placed, amended, or cancelled.

During this time, no trades are executed. However, at a random time between 4:10pm and 4:12pm, the Closing Single Price Auction takes place.

In some instances, such as the last business day before Christmas, and the last business day of the year, trading will conclude at 2pm Sydney time. The Pre-CSPA would then run until 2:10pm, with the CSPA occurring at a random time between 2:10pm and 2:12pm.

Explaining Large Differences in Bid and Offer Prices

If there are no bids that meet the lowest ask price, no volume will be traded. The stock price will remain where it previously traded.

Should a buyer lift their bid price to meet the lowest ask price, the trade will be done at the ask price.

Similarly, if a seller reduces their ask price to meet the highest bid price, the trade will be executed at the bid price.

It is mostly smaller, illiquid stocks where the bid and ask prices may not meet. This is because large-cap stocks generally trade in significant quantity throughout the day.

Furthermore, with large companies, there is often a surplus of volume that overlaps during the auction periods. In this instance, ‘priority’ is given to the buyers who bid the highest price, and to the sellers who ask for the lowest price.

Therefore, if you are wondering why some people bid for shares at a higher price than the indicative opening or closing price, or offer to sell shares at a price that is well below the expected auction price, it is due to the way overlapping volume is matched.

By placing an order at the front of either the buy or sell ‘queues’, the first trades executed will involve these bids or offers. The trade does not necessarily occur at the price that a buyer or seller has submitted. Instead, the trade price occurs at the mid-point where buy and sell volume overlap. 

Placing Orders

Whether you should place your bid above, or your offer below the indicative auction price ultimately depends on how eager you are to buy or sell a stock. This is a personal consideration that should be assessed every time you make a trade.

If priority matters, rest assured knowing that those who ‘bid’ the highest, or ‘ask’ the lowest will maximise the chances of their order being executed. In fact, even if you already have an order sitting in the market, someone might pip you to the post if they bid a higher price, or ask for a lower price, despite the fact the stock could open or close at the price you nominated.