Chapter 7-5 Imbalances

Orders requesting to be executed at the closing price of the trading day on equities are known as Market on Close (MOC) orders.  These buy or sell MOC orders can be entered at any time during the trading day, but can only be cancelled before 3:45 pm.  All MOC orders submitted after 3:45 pm and before 4:00 pm are final and will be executed at the closing price that day.  Moreover, similar to other day orders, any MOC orders submitted at or after 4:00 pm are rejected.

Each trading day at 3:45 pm every stock on the NYSE with a MOC order imbalance reports.  These imbalances often greatly impact stocks as a wave of new information floods the market.  Each stock that does have such an imbalance will report whether it is a buy or sell imbalance along with the exact quantity.  Trading actively takes place over the next 15 minutes as traders speculate how much of an effect the imbalance with have on the closing price of the stock.

These imbalances once reported continue to re-report every 15 to 30 seconds updating how much of an imbalance remains in each of the equities.  Trader’s use this information as a gauge to determine how likely an equity is to filling its entire imbalance by the close.  For instance, if there is a small chance a Buy Imbalance of 1,500,000 shares in ticker symbol MET (MetLife) is going to be filled by the close, it can be expected that the stock will move sharply up as traders speculate off this information.  However, if the imbalance is expected to be filled, than no major action will likely take place in the stock.  Moreover, as like with the rest of the trading day, the overall market direction will impact the stock and its likelihood of an imbalance being filled by the closed.  If the overall market significantly declines from 3:45 pm to 4:00 pm most, if not all, Buy Imbalances will most likely decrease regardless of the imbalances.  Inversely, if the overall market ascends from 3:45 pm to 4:00 pm most, if not all, Buy Imbalances will most likely rise even if the likelihood of an imbalance being filled is extremely high.  Moreover, even though a stock has fallen from 3:45 pm to 4:00 pm due to the overall market, the final print of the day (the Market on Close print) still may be slightly or sometimes even substantially higher as the imbalance is adjusted at the close.

The lure of the Market on Close imbalance is simple.  The greater the percentage of the imbalance at the close for a particular stock, the greater a stock will have to adjust its closing price from its final prints during market hours.  If there is a large buy imbalance in a particular stock at the close that is not satisfied, then it is fair to expect a closing print higher than its final prints during market hours.  The exact opposite occurs when there is a large sell imbalance in a particular stock at the close that is not satisfied.  It is fair to expect the closing print to be lower than the final prints during market hours.  These closing prints due to the imbalances can adjust a stock’s price as little as a few cents to sometimes (in rare cases) as much as a couple of points.  The wide ranging final adjustments that occur are caused by a large unified market order block print of all the remaining MOC orders which were not satisfied by the close.  Depending on depth and thickness a particular stock’s limit book determines how big of discrepancy the closing price will be from its final prints during market hours.

How to Trade Imbalances Using MOC Orders

Almost all advanced trading platforms have access to some sort of MOC Imbalance window.  Locate and open your MOC Imbalance window slightly before 3:45 pm to prepare to view the imbalances for that day.  At 3:45 pm when all the imbalances report, sort all stock imbalances by quantity and quickly scan the list of stocks.  Try to identify any stocks with an imbalance that is more than 10% of the stocks volume for the day.  The greater the percentage of the imbalance the more the stock will likely move.  Once you identify the significant imbalances there are two common ways in order to trade them besides simply scalping the volatile moves.

The first is to enter into the stock soon after the stock reports an imbalance at 3:45 pm looking to lock in a great price close to the price the stock was trading pre-imbalance.  This is extremely hard to do, because there are numerous automated trading systems out there designed to instantly enter into imbalances the exact moment the stock reports, thus causing a spike.  But if you do manage to enter at a price close to the price the stock was trading at pre-imbalance, then you could look to hold onto the position until the close and enter a MOC order.

The second and more common way to trade the imbalance is to wait until after the initial spike to participate.  The advantage to waiting is simple.  All of the automated trading platforms, as well as many manual traders, jump in the very second the imbalances report causing quick, often unsustainable spikes.  After a few minutes the overall market takes a hold of the stocks and helps give a better picture on whether stocks will drift higher or lower into the close.  Therefore, you can make educated decisions on whether you wish to participate in the imbalances and can discern a fair price of entry.  Obviously, the main disadvantage to waiting is that you run the risk of having the stock make a significant spike and it never retraces, thus causing you to chase and enter at an over-extended price.  This is why there are traders who enter immediately and why others choose to wait, there are advantages and disadvantages with each.

Whether you enter immediately into stock with an imbalance or choose to wait for a better entry point, if you do feel there is still a significant imbalance left on a stock or group of stocks going into the close and want to send an MOC order, simply click the down arrow on the price bar of your Level 1 or Level 2 window and change it to “Market MOC”.  Then click the sell order button if it is a buy imbalance and you are long, or click the buy order button if it is a sell imbalance and you are short.  Remember once the order has been sent you cannot cancel it.  Therefore, it is best to wait until the final few minutes of the trading day before submitting you MOC order.  Also, all Market on Close orders must be routed to the NYSE (ECNs such as ARCA and NASD will reject them).  Once you have entered the MOC order, wait a minute or two after the market closes to see what your execution price will be.  The final print of the day will be a large block print which contains your order.  The final print always takes place after 4:00 pm and can print as soon as within the first minute after the close or take as long as 10 to 15 minutes, depending on the discrepancy of the imbalance.

Keep in mind that, like all trading setups, there are no guarantees.  Even the biggest imbalance can reverse and print adversely.  Adverse prints typically occur because too many traders participate in the imbalance causing the imbalance to flip.  For example, if ticker symbol DF (Dean Foods) has a 750,000 share Buy Imbalance and more than 750,000 shares are bought speculating on the closing print (let’s say 1,000,000 shares for example), then the stock most likely make a sharp run up as the flood of buy orders come in before the closing print.  However, if and when all of those buyers exit, if most, or all, of them exit by using a Sell Market on Close order, the outcome will be most likely disastrous.  This is because the imbalance is no longer 750,000 shares to buy, but instead 250,000 shares to sell.  Therefore, the final print would most likely be lower, due to the specialist having to look lower to fill the large sell imbalance.  Always evaluate how much activity has taken place in a particular stock since the imbalance was report at 3:45 pm as too much activity will reverse the imbalance.  Remember to trade carefully when participating in stocks with imbalances due to the great deal of volatility and unpredictability.

A Sample List of Imbalances

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Questions