Price Discovery

What this unit covers

Understand price discovery: how a fair price emerges from competing orders, including the opening and closing auctions, rather than being set by any one party.

By the end you will be able to

• Explain why opening and closing auctions batch orders instead of matching them one at a time.
• Recognise that auctions use the same bid-ask matching as the rest of the trading day.
• Apply the question 'what process produced this price?' to a price that appears without ticking.

How it starts: The Price That Moves Alone

1. You watch a stock you hold move from 412.30 to 412.55 rupees.
2. You wait for market open at 9:15, expecting the same slow ticking.
3. Instead one single opening price appears all at once, with no ticking at all.

Words you will meet

Bid

The price a buyer is willing to pay for a share.

Ask

The price a seller is willing to accept for a share.

Closing auction

A batch matching of end-of-day orders that sets the day's final price.

Order matching

The process of pairing a buyer's bid with a seller's ask to complete a trade.

In this module: Market Microstructure

1. Orders and Execution
2. Bid-Ask Spread and Liquidity
3. Market Depth
4. Price Discovery (this unit)