Finance jargon buster: The Match Out and other “insider” terms explained

A little over two months ago, a new series flashed onto the Livewire site. The Match Out debuted on Monday 6 September, an ASX update published soon after the market closes each day. 

Drawing on the insights of Market Matters'  James Gerrish, it’s quickly become a daily staple to close out the business day here at Livewire Markets.

At this early milestone, already the series has achieved:

• 53 individual articles
• 56,749 page views
• Around 318 discussions of companies (including some double-ups over this period)
• Eight Market Matters Weekly Video Updates.

That's all very well and good. But what, exactly, does "The Match Out" mean?

One of my questions early on – when we first started receiving the content each day from James Gerrish and his team – is “what is a Match Out?” It’s not a term I was familiar with. The finance sector is awash with its own language. Some terms have been around for decades while others are new. For example, “meme stocks” and “moonshots” are new additions to the lexicon.

Speaking with Gerrish, I asked him to explain a Match Out. He used the analogy of a bucket used to collect water. “Match Out” refers to the unmatched buys and sells of the day’s trading being paired up – much like water being poured into a bucket.

“The buys and sells are matched up when the market closes, based on the volume of buys above a certain price and the volume of sells below a certain price,” Gerrish says. “This matches the buy volumes up to the limit price, and matches the sell volumes down to that limit price.”

Leaning on another metaphor, Gerrish says it’s something like a closing auction in the housing market: “It’s the aggregate buy volume getting matched with the aggregate sell volume. Then we match out”. Indeed, this process is often known as the “closing auction.”

Something similar occurs at the market open, between 10am and 10:10am. “But that process is slightly different, the trades done sequentially in alphabetical order, whereas the match out is all done simultaneously.”

An automated process

As Gerrish explains it, around 10% of the total daily volume of stocks traded on the ASX are exchanged at the open, and the same proportion at the close.

“There are many traders out there who do all their orders at the close,” he says.

But Shaw, which deals primarily in large-cap stocks, uses volume-weighted average pricing over the course of any given day. This uses an automated software-driven system that enables each trade to get as close to the average daily price as possible, by trading parcels of shares throughout the day.

“The computer will calculate where in the daily cycle we should participate,” Gerrish says. For example, if they’re processing a $1 million order for BHP shares, the computer might break this up into 10% increments that are traded throughout the day.

Gerrish explains that, in the days before software technology, “old-school operators would put orders into the market manually every 10 minutes, but now, computers provide a more reliable way of doing this.”

This process of VWAP OTD – “volume-weighted average price over the day” is used by many fund managers to execute trades, comprising the bulk of large-cap trades.

“In the small-cap space, a lot of this is done through lines called ‘special crossings,'" Gerrish says. For example, if you want to make a special crossing of a tier-1 stock, you need to trade a minimum of $1 million; to trade a tier-2 stock, the minimum trade size is $500,000.

“We do the hedging for some market-makers and might have, for example, 20,000 ResMed (ASX: RMD) shares to buy,” Gerrish says.

Now for some other investing terminology more commonly used in the world of finance.

Price-to-earnings ratio

The P/E ratio is used for valuing that measures its share price relative to its earnings per share (EPS). The PE ratio is also often known as the “price multiple,” “earnings multiple” or even just “the multiple.”

P/E ratios are used by analysts and investors to create a relative value of a company’s shares. This can be used to compare the stock price against the same company’s historical record or against different companies in the market over time.

While often this is a backward-looking metric, it can also be forward-looking or “projected”.

Price-to-sales ratio

Along similar lines, this compares a company’s share price to its annual sales – or revenue – without considering profit. This is calculated by dividing the share price by annual sales per share.

Return on equity

Used to measure a company’s financial performance, ROE is calculated by dividing net income with shareholder equity. The figure this generates is regarded as a gauge of a company’s profitability and its efficiency in generating profits.

Whether or not a particular ROE is satisfactory depends on the industry in which the company operates. For example, Australian banks are regarded as having high ROE relative to their global peers. On the other hand, companies in bricks-and-mortar retail typically have lower ROE.

Debt-to equity

This number compares a company’s liabilities (debt) to its shareholder equity, which helps determine the degree to which its operations are funded internally versus externally. To calculate this metric, a company’s total liabilities are divided by its shareholders’ equity.

Projected earnings growth

The PEG ratio compares a company’s price-to-earnings ratio to its growth rate. To calculate this metric, a company’s P/E ratio is divided by its growth rate (as a whole number percentage).

Free cash flow

This refers to the cash brought in by a company’s operations minus the cash it spends to support its operations and maintain its assets. This metric considers any changes to working capital.

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