The opening phase of trading on the ASX is a source of confusion for many investors. This is due to the fact that buyers can often be seen bidding a higher price than sellers are offering to sell at. This situation is referred to as “overlapping” and it stems from the daily market opening process which is called the “Opening Phase”. For the first 9 minutes of each day's ASX trading, the market is opened at staggered time intervals in alphabetical groups of stocks. It is during this time that the Opening Price for each stock is calculated. Understanding how the ASX calculates the Opening Price may help you determine an appropriate limit price for your orders.
Prior to the Opening Phase, buyers and sellers (bids and offers) will set prices designed to ensure their trade is executed. For a buyer, this may mean bidding at a higher price than the lowest seller. And for a seller, this may mean offering to sell at a price which is lower than the highest buyer.
When the market opens, the ASX's Stock Exchange Automated Trading System (SEATS) calculates a price between the overlapped buyers and sellers. The result of this is a volume and price weighted average price which is applied to all trades executed in the overlap. An illustration of how this price is calculated is shown below.
In this example, the first trade that would be matched when the market opens will be for 1000 shares between brokers 10 and 18. This would complete both brokers' orders.
The second trade to be executed would be between broker 12 and broker 72 for 800 units. This will complete broker 72's order and leave broker 12 with 1200 units remaining to buy.
As the buyers are still higher than sellers, the matching process will continue. The next order to be executed would be for 1200 units between brokers 12 and 28. This trade will complete broker 12's sell order and will leave broker 28 with 6800 units outstanding.
The fourth trade to be executed during the Opening Phase would be between broker 23 and 28 for 6500 units. This will complete broker 23's order and leave broker 28 with 300 units still to sell at $4.22. The Opening Phase is now complete.
The last trade to be executed in the overlap was: Last Buy order quantity = 6500 Last Buy price = 423 Last Sell order quantity = 6800 Last Sell price = 422
So here is how the Opening Price is calculated: Opening Price = (LBQ X LBP) + (LSQ X LSP) (LBQ + LSQ)
where: LBQ = Last Buy Quantity LBP = Last Buy Price LSQ = Last Sell Quantity LSP = Last Sell Price
Using the formula given, the opening price is: (6500 x 423) + (6800 x 422) 6500 + 6800
= 422.5 cents (rounded to one decimal place)
All four trades shown above are executed at the opening price of 422.5 cents, irrespective of the bid and offer entered at the time of placing the orders.
As the bids and offers in the market can move so quickly in the period prior to the Opening Phase, we recommend that investors set limit prices to cap their exposure.
