Continuous trading is a method for transacting security orders and involves the immediate execution of orders upon receipt by market makers and specialists.
Continuous trading differs from batch trading, which is how market openings function on most exchanges.
Overnight trades are stacked up and market makers adjust prices to accommodate as many of them as possible right at the opening.
Continuous trading forms the basis for all types of trades across secondary exchanges in the United States. It can be compared to batch trading, which is the opposite of continuous trading and occurs only at the market open.
Continuous trading occurs continuously throughout the trading day with immediate execution by market makers. Batch trading, on the other hand, involves executing a batch order of trades that have been delayed by unexecuted orders lined up and awaiting execution. Market makers can view the supply and demand from batch orders prior to the market’s open. Thus, a batch order of trades is executed each day at the market’s open with orders that have been placed for market maker processing during the market’s off hours.
While exchanges all engage in continuous trading nowadays, institutional investors or fund managers may engage in a form of batch trading to re-balance their positions on a daily basis.
Continuous trading is facilitated by the market making process that forms the basis for secondary market exchanges. Market makers execute trades continuously throughout the trading day by matching buyers and sellers. Market makers execute trades that have been submitted for order at a prevailing market price.
The market making process requires a market maker to buy securities from a seller and sell securities to a buyer, matching interested buyers and sellers in the open market. This process is known as the bid-ask process and creates a profit for the market maker. The market maker makes the difference in value between the bid and ask price, also known as the spread.
Investors can submit various types of trade orders. Market orders are submitted for continuous trading execution instantly since the investor is willing to agree to the market price.
Other types of orders are considered to be conditional orders, which are only to be executed after one or more specified criteria are reached. An investor can set a variety of different types of conditional orders. These orders have a specified price that is desired by the investor for execution in the open market.
Therefore, for these orders to be accepted in the market for continuous trading, the price for execution must reach the prevailing market price to be considered by a market maker. Thus, while the market is offering continuous trading, a conditional order from an investor will only be executed in the continuous trading market when the price is available.
In some situations, an investor may also specify whether they wish for their order to be executed in full or partially at their desired price. Certain orders may only execute partially due to the availability in continuous trading, while other orders may require that the entire order be filled.