Digital illustration of latent liquidity influencing stock market auctions.

Decoding Equity Auctions: How Latent Liquidity Shapes Market Dynamics

Elliot Brynn in Business & Economy December 2025 • 4 min read.

"Uncover the hidden forces driving equity auction prices and volatility, and how understanding them can give you an edge."

Equity auctions play a vital role in today's financial markets, serving as crucial mechanisms for setting opening and closing prices for stocks on major exchanges like Euronext, Xetra, and the London Stock Exchange. These auctions consolidate large trading volumes at a single price point, marking the start and end of trading days. The closing auction volume, in particular, has become a significant portion of the total daily exchanged volume, and this has grown in recent years, especially in European markets where it can, at times, account for more than half of the daily volume on days of index rebalancing and derivative expiry.

To enhance liquidity during midday, which typically is the period of lowest liquidity, and to mitigate the exposure to high-frequency market makers who dominate the total turnover during day trading, some primary exchanges such as Xetra and LSE, also introduced a daily intraday auction. For less liquid stocks, Euronext PARIS (2019) implements the double-fixing trading method, i.e., two auctions per day and no continuous double auction. Some researchers advocate for periodic batch auctions as an alternative market design to continuous trading.

During the auction accumulation period, orders can be sent, modified, or canceled, but no transaction occurs. At all times, an indicative price is computed based on matched volume and order imbalances. In European equity markets, continuous trading is paused during auction periods, setting them apart from US equity auctions where trading continues in parallel. This unique structure significantly influences market dynamics during these crucial price-setting events.

Unveiling Latent Liquidity Models in Equity Auctions

Digital illustration of latent liquidity influencing stock market auctions.

Equity auctions exhibit unique features compared to continuous trading, particularly the accelerated event rate and liquidity buildup as the auction time approaches. This phenomenon leads to a reduced price impact and decreased volatility around the indicative price. The paper adapts the latent/revealed order book framework to specifically analyze equity auctions. It provides precise measurements of parameters, including order submissions, cancellations, and diffusion rates. The study focuses on closing auctions in Euronext Paris to describe the full dynamics of the average order book, supporting the relevance of the latent liquidity framework.

The study's findings provide valuable insights into the factors that contribute to a sub-diffusive indicative price and also demonstrate the absence of indicative price predictability.

Essential Parameters: Calibrating the average order book at auction time only requires a few essential parameters, providing estimates of involved latent liquidity.
Submission Rate: The submission rate decreases exponentially with the distance to the indicative price and is inversely proportional to the remaining time before the auction closes.
Cancellation Rate: Cancellation rates are influenced by high-frequency agents. The rate decreases initially and then becomes inversely proportional to the remaining time around the indicative price.
Revealed Diffusion Coefficient: Primarily driven by the indicative price volatility, with price reassessments being, on average, negligible.
Sub-Diffusive Price: Despite the indicative price being sub-diffusive, it remains efficient.

These findings highlight the critical role of latent liquidity in shaping equity auction dynamics. By understanding the interplay of order submissions, cancellations, and diffusion, traders and investors can gain a better understanding of market behavior during these crucial price-setting events.

Implications for Traders and Investors

Understanding the dynamics of equity auctions is crucial for traders and investors. By recognizing the role of latent liquidity, submission rates, cancellation dynamics, and price diffusion, market participants can develop more informed trading strategies and better assess market risks. The insights provided by this study can potentially lead to improved decision-making and enhanced performance in equity auctions.

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This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2401.06724,

Title: Equity Auction Dynamics: Latent Liquidity Models With Activity Acceleration

Subject: q-fin.tr q-fin.st

Authors: Mohammed Salek, Damien Challet, Ioane Muni Toke

Published: 12-01-2024

Everything You Need To Know

What is the primary function of equity auctions in financial markets?

Equity auctions serve as critical mechanisms for determining the opening and closing prices of stocks on major exchanges such as Euronext, Xetra, and the London Stock Exchange. They consolidate large trading volumes at a single price point, marking the beginning and end of trading days, which is essential for market efficiency.

How does the concept of latent liquidity influence equity auction dynamics, and what are the key parameters involved?

Latent liquidity plays a crucial role in shaping equity auction dynamics by influencing the behavior of order submissions and cancellations as the auction time approaches. Essential parameters for calibrating the average order book include the submission rate, cancellation rate, and revealed diffusion coefficient. The submission rate decreases exponentially with the distance to the indicative price, while cancellation rates are influenced by high-frequency agents. The revealed diffusion coefficient is primarily driven by indicative price volatility.

In what ways do European equity auctions differ from those in the US, and how does this impact market behavior?

European equity auctions differ from US equity auctions because continuous trading is paused during the auction accumulation period. This pause, where orders can be sent, modified, or canceled but no transactions occur, significantly influences market dynamics. In contrast, US equity auctions may allow trading to continue in parallel, leading to different price formation processes.

What insights can traders and investors gain from understanding the interplay of order submissions, cancellations, and diffusion rates in equity auctions?

By understanding the interplay of order submissions, cancellations, and price diffusion, traders and investors can develop more informed trading strategies and better assess market risks. Recognizing the dynamics of latent liquidity, submission rates, cancellation rates, and price diffusion allows for improved decision-making and enhanced performance in equity auctions. For instance, knowing how the submission rate decreases exponentially with the distance to the indicative price can help traders anticipate order book behavior.

How do submission rates, cancellation rates, and the revealed diffusion coefficient behave during equity auctions, and what are their implications?

During equity auctions, the submission rate decreases exponentially with the distance to the indicative price and is inversely proportional to the remaining time before the auction closes. Cancellation rates are initially influenced by high-frequency agents and then become inversely proportional to the remaining time around the indicative price. The revealed diffusion coefficient is primarily driven by the indicative price volatility. The sub-diffusive indicative price, despite being efficient, and the interplay of these parameters highlight the critical role of latent liquidity in shaping equity auction dynamics, affecting price formation and volatility.