Locked and Crossed Markets
A locked market occurs when the national best bid equals the national best offer (NBBO) for a security. A crossed market happens when the bid exceeds the offer price, creating an inverted price relationship that violates normal market conditions. Both situations represent market inefficiencies that can impact price discovery and order execution.
Understanding locked and crossed markets
Locked and crossed markets represent anomalous conditions in the price discovery process. In normal market operations, the bid price (what buyers are willing to pay) should always be lower than the ask price (what sellers are willing to accept), with the difference being the bid-ask spread.
A market becomes locked when:
- The best bid price equals the best offer price
- Multiple trading venues show identical bid and ask prices
- No immediate trading can occur due to regulatory or technical constraints
A market becomes crossed when:
- The best bid price exceeds the best offer price
- Price quotes become inverted across different venues
- Arbitrage opportunities theoretically exist but cannot be captured
Market structure implications
Locked and crossed markets often result from:
- Market fragmentation across multiple trading venues
- High-frequency trading activities
- Technical issues in market data dissemination
- Regulatory constraints preventing immediate execution
Regulatory framework
Regulation NMS Rule 610(d) specifically prohibits market participants from engaging in practices that lock or cross protected quotations. The regulation requires trading centers to establish policies and procedures to reasonably avoid displaying quotations that lock or cross any protected quotation.
Impact on trading systems
Trading systems must implement sophisticated logic to:
- Detect locked and crossed market conditions
- Apply appropriate pre-trade risk checks
- Route orders to resolve market inefficiencies
- Comply with regulatory requirements
Next generation time-series database
QuestDB is an open-source time-series database optimized for market and heavy industry data. Built from scratch in Java and C++, it offers high-throughput ingestion and fast SQL queries with time-series extensions.
Market quality implications
Locked and crossed markets can affect:
- Price discovery efficiency
- Market liquidity
- Trading costs
- Execution quality
Resolution mechanisms
Markets typically resolve locked and crossed conditions through:
- Smart Order Router intervention
- Market maker quote updates
- Trading venue coordination
- Regulatory circuit breakers
Best practices for market participants
Traders and market makers should:
- Monitor for locked/crossed conditions
- Implement appropriate algorithmic risk controls
- Maintain compliance with regulations
- Adjust trading strategies during anomalous conditions
Time-series considerations
Monitoring and analyzing locked and crossed markets requires:
- High-precision transaction timestamping
- Real-time market data processing
- Historical pattern analysis
- Performance measurement systems
The frequency and duration of locked and crossed markets serve as important indicators of market quality and structural integrity, making their measurement and analysis crucial for market participants and regulators alike.