Market imbalance also referred to as an order imbalance. It happens when there is an excess number of buy or sell orders for a given stock at a particular time. Market imbalances are often responsible for extreme moves in share price following a notable good or bad news report. Usually market imbalances work themselves out fairly quickly. A market imbalance will move a stock’s share price either higher or lower. Traders on the other side of the trade jump in to take advantage of the move and eliminate the imbalance.
Market imbalances caused by news can be somewhat unpredictable. Other imbalances usually occur at the beginning or end of a trading day. Some traders see the potential here and take advantage of it.
Setting up your Strategy
During the last hour of trading and in the two minutes prior to the market open every day, exchanges issue information on market imbalances for individual stocks through their data feeds. Market imbalance traders find information about market-on-close order particularly useful. Market-on-close orders are orders to buy or sell shares at the last market price of the day at or just after the closing bell. Market-on-close orders must be placed at least 15 minutes prior to the closing bell at 4 p.m. ET.
Traders waiting for the imbalance feed at around 3:45 p.m. can watch for large end-of-day imbalances in individual stocks. When a certain stock has a large buy imbalance, the stock’s share price may possibly rise during the last 15 minutes of trading. Traders will see the bullish market-on-close imbalance and may want to get in on the action. Sellers may see a large buy imbalance as a chance to set limit sell orders slightly above the current market price headed into the close. They may think this opportunity will allow them to take some profits from all the market-on-close orders.
It’s Easier in Theory
As with many trading strategies, the idea of trading market imbalances is a lot easier in theory than it is in actual execution. You need to beware that high-frequency trading algorithms sometimes manipulate closing imbalances in the last few minutes of a market session, issuing large orders that can remove or even flip a stock’s imbalance in mere milliseconds. The market is efficient in quickly eliminating market imbalances along with any potential trading opportunities.
End-of-day market imbalances are usually only large enough to produce small moves in share price. Because the moves are small traders need to place larger orders or have high leverage to make meaningful profits. When commissions are taken into account it makes it even harder to realize a profit on these small swings.
This article is provided for educational purposes only and is not considered to be a recommendation or endorsement of any trading strategy.