You ever wonder why there are giant spikes of volume during the last minute of trading but little price change? That’s the closing auction and is the period of highest liquidity during the stock market session mainly because of the market on closer order.
It’s where most investment funds, end-of-day algorithmic traders, and index rebalancing occurs.
The market-on-close order is primarily the mechanism used by these institutions to buy on the close.
What is a Market-on-Close Order?
Market-on-close orders are market orders that execute at the closing bell, or 16:00 EST. Because they’re market orders, you can’t specify any price and instead receive the closing print.
They guarantee the time of execution, not the price.
You have to submit your MOC orders for NYSE stocks before 15:45 EST and before 15:50 for Nasdaq stocks.
Let’s take an example.
You’re day trading XYZ stock intraday. The trend is strong, so you’d like to hold it into the close, but carry no overnight risk.
You’ve observed that sometimes strongly trending stocks can make strong moves on the close, so you’d like to exit at the last possible moment without holding the stock overnight or trading after hours.
This is where the market-on-close order comes in.
You submit a MOC order to your broker at 15:30 EST, before the deadline. The close at 16:00 EST comes, and you’ve exited at almost exactly 16:00:00 and received the closing print.
Things To Note About MOC Orders
While the official deadlines for NYSE and Nasdaq are 15:45 and 15:50, respectively, your broker may have different rules. Check with your broker because they’re all different.
Neither NYSE nor Nasdaq allow you to cancel your MOC order after the 15:45 and 15:50 respective deadlines.
What Happens During a Market-On-Close Order? The Closing Auction
The NYSE has designated market makers, and one of its roles is to facilitate the closing auction. They achieve this by analyzing all closing orders and setting an auction price accordingly.
One of their obligations when running this auction to provide liquidity to order imbalances.
For example, if there are orders to buy 100,000 shares and sell 120,000 shares, they’d need to provide the 20,000 shares of liquidity to close that gap.
Here’s the NYSE’s published closing auction timeline:
14:00 EST: floor brokers receive imbalance information.
According to Dennis Dick, a prop trader and host of Benzinga’s Pre-Market Prep show, the floor brokers getting this information usually price the imbalances in, so there are no huge price spikes. However, when the NYSE floor closed for several weeks due to the coronavirus, this created large spikes of volatility upon the public release of imbalance information at 15:50 EST.
15:50 EST: NYSE publishes the imbalance data publicly to all subscribers of that data feed. This feed updates every five seconds.
16:00 EST: closing auction occurs
The ITG, which was an agency broker acquired by HFT giant Virtu Financial (VIRT), published a timeline of the NYSE closing auction in their paper on the subject:
You can view how much buying and selling will occur at the market close–these are called market-on-close imbalances, and it’s public data you can subscribe to for a modest fee.
It might seem counterintuitive that this is public data, but there’s a method to the madness.
You see, giant institutions like mutual funds and ETFs need a lot of liquidity to minimize their market impact. Further, most ETFs are index funds, aiming to track an index.
They need to mirror their underlying index closely, so they have to trade on the close, or else they’d be getting different prices than the index records.
So, the exchanges make the data public easier for these big buyers and sellers to find liquidity. Market makers are obligated to provide liquidity to them.
Where to Find Order Imbalance Data
Any broker that caters to active traders like TradeStation, Interactive Brokers, Lightspeed, etc., will allow you to subscribe to imbalance data feeds for a relatively modest price.
Most of the time, it’s included with other market depth data.
Because markets react so quickly to imbalance data, it’s hard for all but the fastest HFT firms to capitalize on these.
As a result, they’re not directly useful for most.
Still, some services like Market Chameleon created analytical tools to view persisting imbalances over periods of several days or weeks, which may indicate that institutions are building large positions in a sector.
Many traders learned how the closing auction works the hard way in 2020.
When NYSE shutdown their trading floor temporarily, preventing them from pricing in the large imbalances starting at 14:00 EST, the market experienced huge spikes of volatility when the imbalances are announced publicly at 15:45 EST.
Credit: Warrior Trading