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What is a Locked Market?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 18 September 2016
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    Conjecture Corporation
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A locked market is a short-term situation that can occur within a marketplace. The phenomenon takes place when the bid and ask prices associated with a given security are identical. Market conditions of this nature may be experienced in both an equity market and a futures market. This set of circumstances effectively eliminates any differences in the bid-ask spread between the two prices. A locked market is most likely to occur in markets that are experiencing a high amount of trading volume, but rarely last for any appreciable amount of time.

There are several different reasons why the bid price and the ask price may be the same for a short period of time. The most common occurrence has to do with the activity of the buyer and seller in the transaction. If the initiator of the transaction has tendered payment, but the other part has not yet received the payment, then the lock will appear and remain in place until the payment is received. This is particularly true in situations in which one party has paid the brokerage involved in the transaction but that payment has not been credited to the other party’s account. Once the transfer is complete, the locked situation is resolved and trading can continue as before.

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In a futures market, a locked market may take place because of the high volume of trading activity that has occurred during the current trading day. If the prices attain their daily limit move, the prices are frozen on those securities until the next trading day. During that period of time, there is no difference between the bid and ask prices. Once the new day begins, any orders entered before the official opening of the market are usually sufficient to establish the spread once again and the trading activity begins to escalate once more.

It is important to remember that a locked market does not mean that the marketplace has sustained any type of permanent damage. This type of market occurrence also does not automatically indicate any type of negative characteristic of the security involved in the lock, or that a buyer or seller has engaged in activities that will create any type of ongoing disruption in that market. Once the circumstances that created the locked market are resolved and the bid-ask spread is reestablished, the market will continue as before. For this reason, investors are usually not alarmed by a locked market and simply focus on other investment activity until the lock is resolved.

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