The New York Stock Exchange (NYSE), sometimes referred to as “the Big Board,” is the oldest and largest stock exchange in the United States. The NYSE is the place that investors usually think of when they imagine traders shouting out prices and making wild hand gestures in the live securities auction process known as open outcry.
While electronic trading technology is now used to facilitate the majority of trading in high-speed and high-volume operations, human traders still play a significant role in these venues. The way that opening and closing prices are set at the NYSE is still based on factors of supply and demand that take place in a modern-day, auction-style format.
- The way that opening and closing prices are set at the New York Stock Exchange (NYSE) is still based on factors of supply and demand that take place in a modern-day, auction-style format.
- Market-on-open (MOO) and limit-on-open (LOO) orders can be accepted before the market officially opens, but they only trade in the opening auction.
- NYSE officials may disregard the stock’s previous closing price and can adjust the price as the reference point to start trading on the following day if certain events, which occurred when the exchange was closed, are expected to greatly affect the price of that security.
The Opening Auction
The NYSE’s official market opening time is 9:30 a.m. Eastern time (ET), which is when the opening auction commences. However, orders to buy and sell securities can be entered as early as 6:30 a.m. ET, but only by NYSE names.
Orders can be accepted before the market officially opens. However, market-on-open (MOO) and limit-on-open (LOO) orders can only be traded during the open auction. MOO orders seek to purchase shares at the current market price when the market opens. LOO orders seek to purchase a specific number of shares at a specific price when the market opens. If the requested price is not met, then the trade does not take place.
The first data stream of the new trading day includes a reference price for each security. This price generally matches the previous night’s closing price. The data stream also includes data regarding the current imbalance between buy and sell orders and prices. By publishing this data, the NYSE gives traders the opportunity to adjust their trades to match up buy and sell orders.
According to the NYSE’s website, the historical TAQ order imbalance date is published at intervals of five minutes (until 9 a.m. ET), one minute (from 9 a.m. ET to 9:20 a.m. ET), and 15 seconds (from 9:20 a.m. ET to 9:35 a.m. ET). A few minutes prior to the opening auction, the likely opening price for each security is added to the published data stream.
Instances of Price Adjustment
The human element comes into play when certain events, such as late-breaking news, are likely to affect the price of a security. For instance, if a company announces devastating losses after the market has closed, then the price for the firm’s stock is likely to decline sharply when the market opens the following day. Under such circumstances, a decision may be made by NYSE officials to disregard the stock’s previous closing price and adjust the price accordingly to set the reference point to start trading on the following day.
Such a price adjustment would be made by a designated market maker (DMM). A DMM is assigned to each security that trades on the NYSE. The DMM has the authority to make price adjustments to facilitate trading by maintaining liquidity. Similarly, the DMM can delay the start of the trading day for a given security to facilitate orderly trading. The DMM is also obligated to step in and purchase securities if needed to maintain the smooth functioning of the market.
At 9:30 a.m. ET, the DMMs begin to open trading for each security under their control in an official capacity. Trading for an individual security can be delayed, if necessary, without affecting other securities. Once a security has opened for trading, buyers and sellers trade securities with three factors shaping prices: supply, demand, and news. When the highest bidding price matches the lowest asking price, a trade takes place.
DMMs get some help from electronic trading firms known as Supplemental Liquidity Providers (SLPs). The SLPs have a financial incentive to add liquidity to the market by maintaining a bid or offer at the National Best Bid and Offer (NBBO) price in each of their assigned securities at least 10% of the trading day. The NBBO is the highest bid price and the lowest asking (offered) price on a given security.
The Closing Auction
At the end of the trading day, a closing auction takes place. This is similar in many ways to the opening auction. While the NYSE closes for the day at 4 p.m. ET, orders that help to determine the day’s closing price start coming in even before the market opens, as the trades can be placed as early as 6:30 a.m. ET (same as the opening auction).
Just as there are two types of orders that play specific roles in setting the opening prices, there are also two types of orders that play roles in setting the closing prices: market-on-close (MOC) and limit-on-close (LOC). MOC orders seek to purchase shares at the current market price when the market closes. LOC orders seek to purchase a specific number of shares at a specific price when the market closes. If the requested price is not met, then the trade does not take place.
Regular orders that start to come in when the market officially opens at 9:30 a.m. ET are also factored in the closing price, as are a special type of order known as the Closing Offset (CO) Order. CO orders are limit orders that are executed only to offset any buy/sell imbalance. They help to facilitate trades and add liquidity to the market.
Dissemination of trade imbalance information begins at 3:50 p.m. ET at intervals of every one second, if different from prior posting, until 4 p.m. ET. During this time frame, information about trading volume, matching trades, trade imbalances, and pricing is released. The data provides insight into the direction that prices are moving and the interest level in various securities. At 3:58 p.m. ET, MOC and LOC orders are final and can no longer be canceled. At 4 p.m. ET, the market closes for the day.
The Bottom Line
The process for setting opening and closing prices is more than just an auction. The auction process is an intentional effort to facilitate trading in a highly complex market place. The auction market blends high technology, human interaction, and highly specialized language of its own to create an efficient arena in which business is transacted. It blends a high volume of trade requests from a diverse array of investors into a seamless effort that takes place in real time. And best of all, from an investor’s perspective, the process takes place seamlessly and instantly.