Locked Market
Contents
Locked Market
What Is a Locked Market?
A locked market occurs when the bid and ask price for a security are identical. This is abnormal and typically happens due to the complexity of modern financial markets.
Key Takeaways
- A locked market is when the bid and ask prices for a security are temporarily the same.
- It happens due to timing differences in price quotation information from different stock market systems.
- Locked markets are rare and short-lived.
How Locked Markets Work
Today, when investors want to buy or sell a company’s shares, they interact with multiple underlying markets and computer systems that are combined to show the best available bid and ask prices.
For instance, at any given time, the best bid and ask prices may come from different marketplaces. The information from these marketplaces should be consolidated to present investors with a unified view of the best price.
In practice, however, differences in latency and processing speed among the computer systems can result in timing differences in the arrival of quote information.
Therefore, it’s possible for the bid or ask price shown to be outdated, leading to a locked market where both prices are the same. In theory, this should not happen because any match between bid and ask prices should clear the transaction. But if one or both prices are outdated, the transaction cannot clear, resulting in temporarily persistent prices—an illusory situation.
Locked Market vs. Crossed Market
Locked markets are related to crossed markets, where the bid price is higher than the ask price. Crossed markets also occur in electronic and computerized trading.
Crossed markets typically arise during extremely fast or slow trading conditions. Fast trading may occur during panic selling, while slow trading may happen in illiquid markets.
