A price monitoring extension is activated when there is a movement in price that is a pre-determined percentage (set by a security’s Millennium Exchange sector) above or below the most recent automated trade. It is automated by the London Stock Exchange and has no human intervention whatsoever.
In this article, we’ll explore price monitoring extensions in detail and what they mean for private investors and retail traders.
What is a price monitoring extension on the London Stock Exchange?
A price monitoring extension on the London Stock Exchange is an extension of the auction period in order to allow more traders to place bids and offers to bring the uncrossing price down to a price that is close to the previous uncrossing trade price.
When are price monitoring extensions triggered?
Price monitoring extensions are triggered to prevent the current indicative uncrossing price closing a certain percentage above or below the last automatically executed trade.
The percentage varies from stock to stock and it is set in reference to a stock’s Millenium Exchange sector. This can be viewed on the London Stock Exchange’s Trading Services.
Why do price monitoring extensions occur?
Price monitoring extensions occur to reduce volatility in the market. They occur at the end of an auction’s call period.
When a price monitoring extension is issued this is to alert the market that there is an indicative uncrossing price (sometimes known as auction price) far away from the last electronically traded execution price.
The goal of the price monitoring extension is to attract more market participants to get involved in the auction. This narrows the gap between the indicative uncrossing price to the current market price (assuming more market participants get involved).
What happens during a price monitoring extension?
When a price monitoring extension is activated then an RNS will be published through the Regulatory News Service in order to alert the market that there is an indicative uncrossing price above or below the specific threshold for that security.
The call period of the auction will also continue for five minutes. This is to allow existing and new market participants in the auction the opportunity to place orders in the auction call period.
Once this extra five minutes has passed then the auction will then attempt to uncross which takes place at a random point within 30 seconds after the call period finishes.
If the extra five minutes still doesn’t result in a price that can uncross then a second price monitoring extension will be issued to the market.
The call period will again be extended by another five minutes. Regardless of whether the indicative uncrossing price is above or below the pre-determined threshold the auction will take into account all existing orders and then match these in an uncrossing.
Why have a price monitoring extension?
Price monitoring extensions are designed to reduce volatility in the market and aid effective price discovery.
The price monitoring extension signals to the market that there is a discrepancy between the indicative uncrossing trade and the current price.
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What is the purpose of a price monitoring extension?
The purpose of a price monitoring extension is to provide an opportunity for the market to reflect a fair price for that security.
Price monitoring extensions make the market more efficient (although for traders that is not always best!) and it encourages more market participants to get involved in the auction to generate a more reliable uncrossing trade.
Price monitoring extension example
Price monitoring extension RNS announcements are published to the market when the individual security’s auction call period has been extended. Below is an example of my RNS feed showing several stocks that are extended once and then extended twice five minutes later.
The announcement is simple and explains that “the auction call period has been extended in this security by 5 minutes”.
This is shown in the example below.
A second price monitoring extension will be issued to the market if the sizes of orders and prices are not able to uncross.
We now understand what price monitoring extensions are and the function of them. Finally, we move on to if price monitoring extensions are good or bad.
Are price monitoring extensions good or bad?
Price monitoring extensions are neither good nor bad. They are simply a function of the market to attempt to reduce excess volatility from the market.
They perform the same role as trading halts do in the US exchange by pausing the electronic matching process and price movement in an attempt to calm a fast-moving momentum – the same way a strategically used time out can work in sport.
Electronic order book users trading the SETS platform in the United Kingdom should be aware of price monitoring extensions as they can represent opportunity should both the first and second price monitoring extension by ignored by the market.
This article has covered everything you need to know about price monitoring extensions and should answer many FAQs.
You can find out an individual security’s Millennium Exchange sector which details a stock’s threshold for an unscheduled auction here.
For further information on auctions, you can read my article about the uncrossing trade.