What is Price Continuity?
Price continuity occurs when the number of transactions (volume) does not in and of itself affect a security's price.
How Does Price Continuity Work?
In trading, buyers offer bid prices and sellers offer asking prices. The difference between the bid and ask (the bid-ask spread) is usually much smaller if the market for the traded security is large.
Price continuity is a sign that there are a lot of buyers and sellers in the market for a particular stock. For example, if Company XYZ is a widely-held stock, the bid-ask spread may be $0.25. Regardless of whether the price goes up or down, if there is price continuity, the bid-ask spread will remain relatively constant.
Why Does Price Continuity Matter?
Price continuity is an indication that there are a substantial number of buyers and sellers available. In turn, it is an indirect reflection of a security's risk. For this reason, NYSE specialists are tasked with providing price continuity in the markets by acting as a liquidity provider when it's difficult to match buyers and sellers at a given time. This responsibility, of course, can cost a specialist a lot of money, but it is also a potential source of financial gain.