An uncrossing algorithm is a computational procedure used in batch auctions or specific trading systems to determine a single price at which the maximum possible volume of buy and sell orders can be executed simultaneously. This mechanism facilitates efficient price discovery and fair allocation of trades, particularly for illiquid assets or during specific market events.
Mechanism
The mechanism involves aggregating all bid (buy) orders and ask (sell) orders submitted within a defined time window. These orders are then sorted by price, creating cumulative supply and demand curves. The uncrossing algorithm identifies the price point where the overlap between these curves is greatest, or where the imbalance between buy and sell orders is minimized, to execute the largest possible quantity of trades at that single clearing price. This process aims to clear the order book effectively.
Methodology
The methodology for implementing an uncrossing algorithm requires precise timestamping of order submissions and robust computational power to process large volumes of data efficiently. In crypto markets, such algorithms are applied in daily settlement auctions for derivatives or in specific RFQ environments to match large institutional orders for digital assets. This approach minimizes price manipulation by removing continuous price fluctuations and provides a transparent, centralized price point for trade execution, enhancing market integrity for institutional options trading.
Closing call auctions are a regulatory mandate to ensure benchmark integrity by concentrating liquidity to form a fair, manipulation-resistant closing price.
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