Locked Market
A locked market occurs when the National Best Bid (NBB) equals the National Best Offer (NBO) across trading venues, creating a temporary pricing anomaly that violates normal market conditions. This situation is distinct from a crossed market, where the bid price actually exceeds the offer price.
Understanding locked markets
Locked markets represent a breakdown in normal price discovery mechanisms, where buying and selling interests temporarily converge to the same price point. In efficient markets, the bid-ask spread should remain positive to facilitate orderly trading and price formation.
Causes of locked markets
Several factors can contribute to locked market conditions:
- Market fragmentation across multiple trading venues
- Latency arbitrage opportunities
- Technical issues in market data dissemination
- Regulatory requirements that prevent immediate execution
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Impact on market quality
Locked markets can significantly affect market quality and trading behavior:
Price discovery
The absence of a spread between bid and ask prices complicates price discovery mechanisms and may indicate underlying market inefficiencies.
Trading dynamics
Market participants must adjust their algorithmic trading strategies to account for locked market conditions, often implementing specific logic to handle these scenarios.
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.
Regulatory considerations
Regulation NMS in the U.S. addresses locked markets through specific provisions:
- Rule 610(d) generally prohibits displaying quotations that lock or cross protected quotations
- Exchanges must maintain policies and procedures to prevent locked markets
- Exceptions exist for certain automated trading scenarios
Market maker obligations
Market makers face particular challenges during locked market conditions:
- Must maintain continuous quotes while avoiding lock conditions
- Need to adjust their market making algorithms to handle locked scenarios
- Required to comply with exchange-specific rules regarding locked markets
Prevention and resolution
Trading venues employ several mechanisms to prevent and resolve locked markets:
- Price sliding functionality
- Trade-through protection systems
- Smart order routing logic
- Market data validation checks