Batch Trading: What it is, How it Works, Continuous Trading

What Is Batch Trading?

Batch trading refers to an accumulation of orders that are executed simultaneously. Batch trading saves time and effort by treating multiple buy and sell orders as one large transaction. In the U.S., batch trading is only allowed at the market open and pertains solely to orders placed during non-market hours.

Understanding Batch Trading

Batch trading is a concept that is used only once per day in the U.S. market to process orders that have accumulated during non-market hours. During all other regular U.S. market trading hours, continuous trading is used.

The usefulness of batch trading is evident at the opening of the market each day. For example, institutions that aggregate individual investors' orders into the movements of various funds may place orders outside of market windows. These orders may be very large but can be balanced out by equal and opposite orders by individual traders and investors or smaller trading firms.

If the retail orders are on the opposite side of an institutional order, then a single batch order can match them. Without batch trades, market prices might be much more volatile at the opening trade each day.

Generally speaking, batch trades are typically used on high-volume stocks that have accumulated orders during non-trading hours. To qualify for an opening market batch trade, a security’s order price must be matched with an appropriate market counterpart at the time of the market’s open. This constrains most batch trades to include market orders.

However, it can also include any limit or stop orders accepted at the market price. Since market orders have no specified price they typically encompass the largest percentage of an opening market’s batch trades. Limit orders with specified prices set by buyers and stop orders with specified prices set by sellers can also be included if their order prices match the opening market price.

Continuous Trading

Batch trading is restricted to the market open in the U.S. so as to ensure that the stock's price is fair and just, not fluctuating wildly from one batch trade to the next. During the regular hours of a market exchange, the exchange will use continuous trading. Continuous trading is a function of standard exchange processes which are facilitated through market makers who match buyers and sellers and then execute transactions immediately at an ask price.

Continuous trading is a primary component of the market that keeps securities efficiently priced. In continuous trading, securities are priced through a bid/ask process that is facilitated by a market maker. Market makers are responsible for matching buyers and sellers in daily trading. They can be either individuals working for an exchange, or technology systems devised by the exchange.

In continuous trading, a market maker seeks to match buyers and sellers using bid and ask prices. A market maker profits from the bid/ask spread which provides compensation for the service of executing a trade. In a market exchange, the market maker bids for a security at a low price, buying the security for the investor. They then sell the security to the investor at the ask price generating a profit through the process of matching the buyer and seller in the secondary market.