The stock exchange runs on an auction system, where willing buyers and sellers are matched up as share prices change. The exchange wants as many pending orders as possible to be filled by the time the market closes for the day. To facilitate this goal, the exchange publishes order imbalance information on stocks near the end of the trading day. Traders can use the data to predict short-term price changes in the affected stocks.
Closing Bell Orders
A couple of order types that can be used to buy or sell shares are the market-on-close and limit-on-close orders. These order types are entered at least 15 minutes before the stock market closes at 4 p.m. for New York Stock Exchange traded stocks. The orders are held and filled to the end of the trading day at a price as close as possible to the closing stock value. The exchange operates what it calls a closing auction at 4 p.m. to fill all of the market-on-close and eligible limit-on-close orders.
Starting at 3 p.m.and continuing until the market closes, the NYSE publishes through its data feed the imbalances between pending buy and sell orders to be cleared at the closing auction. Since market-on-close orders can be either market or price limit types of orders, the imbalance report will show the orders that have been sent in to buy and sell at a range of share prices. A buy imbalance indicates the existence of more orders to buy at a specific price or at the market price to be filled when the stock exchange closes than there are offsetting sell orders.
Pushing Prices Higher
With the way the market functions during the day, an excess of buy orders will push a stock price higher until the sell orders balance out the ones to buy. However, the close buy order imbalance cannot be balanced out by a rising price, because this type of order is meant to be filled at the closing price. What an imbalance shows is that all of the pending orders may not be filled. The imbalance becomes especially meaningful after 3:45, when the on-close orders can no longer be changed.
Individual Trading Considerations
The stock exchanges publish the imbalance numbers to attract more orders that could even out the discrepancy. A closing buy order imbalance may draw sell orders at higher prices to try to lock in some extra profit. If you want to sell stock, you may be able to enter a regular market order or a limit order at a higher price right at the end of the day and pick up a few extra cents on the price you get for your shares.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.