Locked Market

A locked market is a market in which a stock's bid price at one exchange and ask price at another exchange are identical. In a locked market, there is no bid-ask spread; normally, there is a difference between the highest price a buyer will pay for a security and the lowest price a seller will accept. Locked markets are unusual and typically short-lived.

In a locked market, it may be necessary for exchanges to halt automatic order execution and implement manual order execution because executing orders in a locked market is prohibited. Securities and Exchange Commission (SEC) regulations require national exchanges to not even display quotes that indicate a locked market. The SEC considers a locked market to violate fair and orderly market rules, which requires that buyers and sellers receive the next and best available prices when trading securities.

The SEC passed Regulation National Market System (Reg NMS) in 2007, which banned locked markets in an effort to create a more orderly and competitive means for investors to transfer risk on the secondary market. However, there has been controversy surrounding this ban. Some argue that the market moves too quickly for the ban on locked markets to have its intended effect.

Instead, the ban on locked markets makes it more difficult and more expensive for investors to buy stocks. Instead, a securities information processor (SIP) is likely to display incorrect bid-ask information for a given security. This can lead exchanges to decline orders because they are relying on inaccurate pricing information.

Moreover, not all investors are treated the same way by Reg NMS. High frequency traders (HFTs) may be able to get around locked market restrictions, allowing them to take advantage of the lag time between the stock bid and price changes and SIP updates. This can allow them to trade stocks at more advantageous prices than other investors trading the same stocks at the same exchange at the same time.

However, many argue that a repeal of the ban on locked markets would be pointless due to the many other rules and regulations in place to prevent locked and crossed markets. While some assert that a repeal of the ban on locked markets would eliminate many different order types and make the market less complex, others argue that a repeal of the ban would lead to more crossed markets, or markets in which bid prices are lower than asking prices.