The National Association of Securities Dealers Automated Quotations, commonly referred to as Nasdaq, is a computerized marketplace where stocks are traded from 9:30am to 4pm Eastern Standard Time. While trading stops at 4pm, the business world does not. Companies often wait until after the stock market closes for the day to announce various news items, such as corporate earnings, mergers, acquisitions, staff reductions and changes in key personnel. Similarly, geopolitical events, natural disasters and other market-moving developments can take place any time of the day or night.

Corporate news and other developments generate information that often causes investors to change their sentiment toward companies, sectors or segments of the financial markets. Good news makes investors want to own various stocks and drives prices higher, and bad news has the exact opposite effect. In turn, the investors place orders to buy and sell after the market has closed for the day and before it opens for business in the morning. This creates a need for the Nasdaq to factor the news and resulting demand to buy and sell into the prices of the securities when the stock market reopens for business. Accordingly, the prior day’s closing prices are not the same as the next day’s opening prices.

To set prices for trade requests that want the opening price, Nasdaq uses a process known as the “opening cross”.

Calculating Prices
Prices for the opening cross are determined through an auction process, with buyers and sellers placing offers and counteroffers until prices match, resulting in a trade. The objective of the opening cross process is to achieve maximum execution by getting the greatest number of shares of a given security to trade at a single price. The process is not as simple as it sounds.

While trades are only executed from 9:30am until 4pm, Nasdaq accepts trade requests for several hours after the market closes and several hours before it opens. The data on these requests is made available electronically, so that market participants can see the prices at which buyers are willing to buy (bid) and prices at which sellers are willing to sell (ask). Price matches are made using a 10% threshold to calculate the opening price. For example, if a buyer offers $100 per share for a given stock and a seller wants $110, the midpoint of the offer would be $105. The midpoint number is then multiplied by 10%. The resulting $10.50 is then added to the buyer's offering price, moving it to $110.50 and subtracted from the seller price, moving it to $99.50. This tells investors that the opening price for the shares in question will be between $99.50 and $110.50.

This information is updated and provided to potential buyers and sellers every five seconds electronically. A host of additional data are also provided, including detailed information about the prices at which orders would clear against each other, the number of paired buy/sell offers and the imbalance between offers. As potential buyers and sellers see this data, they place additional trades that are then factored into the prices.

Since buy and sell prices must match for a trade to take place, Nasdaq permits orders to be entered as Market-On-Open (MOO) and Limit-On-Open (LOO). MOO orders can be placed, changed or canceled from 7:30am until 9:28am. This enables traders to enter orders, gauge the direction or prices, and cancel and re-enter orders to better match offers to buy with offers to sell.

LOO orders are entered at a predetermined price, referred to as a “limit” price. These orders are executed if the trade can be conducted at a price that is equal to or better than the requested “limit” when the market opens. If a match cannot be made, the orders are rejected.

At 9:30am, trades are executed an opening prices designed to match the maximum number of buyers and sellers. Trade execution involves only those trades requested to take place at the “on open” order price and “imbalance only” orders designed to provide liquidity and facilitate trading. Keep in mind that Nasdaq consists of member firms that work together to create a fluid marketplace where securities can be bought and sold through efficient matching of orders. Accordingly, these firms participate in maintaining a functional market by placing trades designed to facilitate liquidity. These trades are referred to as Opening Imbalance Only (OIO) trades, and the data relating to them is not displayed. A variety of other trade types can also be entered, and each is handled according to a detail set or rules.

Once the opening cross price is set and trades are executed, any remaining MOO, LOO and OIO requests that have not been matched are canceled. Trades that come in after the market opens enter the standard daily trading routine that takes place during normal business hours. This process employs an automated “matching engine” that pairs buyers and sellers. Just as in the pre-open process, buyers and sellers can see buy/sell prices and make adjustments to their trades to find a match. The difference during normal trading hours is that trades take place the moment a match is made, as opposed to waiting for a specific time (market open at 9:30am).

The Bottom Line
To quote Nasdaq, “The Nasdaq Opening Cross process means that all investors have access to the same information, and their orders get the same treatment. This brings fairness and transparency into the marketplace, and that can be a highly active time of the trading day.” It also facilitates the smooth, efficient functioning of the securities auction process, efficiently matching buyers and sellers to ensure liquidity. This is particularly important. Market liquidity gives investors the confidence to make investments with the assurance that, should they need to sell, they can do so quickly. It also presents opportunity. With highly liquid markets populated by active buyers and sellers, investors have plenty of opportunity to move in and out of the markets quickly and easily in pursuit of profits.

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