What are Buyers or Sellers "On Balance?"
Buyers or sellers "on balance" describes an order imbalance in a market at a specific point of time. The phrase also describes traders whose activity over a period of time trends predominately toward buying or selling, rather than a balance between the two.
- Being a buyer or a seller "on balance" means a trader has a bias toward buying or selling and doesn't react like other traders to price incentives and market forces.
- If there are enough buyers or sellers "on balance," the market itself can become biased, leading to price distortions. Buyers and sellers can develop a bias because they have goals other than getting the best price in a trade, such as hoarding or shedding stock shares.
- Large markets are less affected by buying and selling "on balance" because they are more liquid, and biases are smoothed out by the greater number of market participants.
How Buying or Selling "On Balance" Works
Buyers or sellers "on balance" always suggests a situation in which more orders of one type outnumber orders of the opposite type. If a current market or issue has sellers on balance, more traders have entered sell orders than buy orders, causing an order imbalance. Conversely, if a market or issue has buyers on balance, more traders have entered buy orders than sell orders.
Under normal conditions, these imbalances work themselves out quickly. However, in some situations where trading cannot take place, buyers-on-balance or sellers-on-balance conditions can persist until the resumption of trading provides enough market liquidity to bring trades back into balance.
Investors may be considered buyers or sellers on balance over a period of time if they purchase more shares than they sell, or vice versa. A buyer on balance may see a number of potentially profitable opportunities in the market or may simply be saving diligently for retirement. A seller on balance may fear a market downturn or may have reached a point at which they want to take profits out of existing positions.
Trade Order Imbalances
Market orders require only that a broker fulfill them at the best available current price. These orders are some of the most common order types filled in the market. They occur at a security's current bid price for sell orders and current ask price for buy orders.
Trade imbalances tend to be temporary because markets can typically adjust to a changing demand environment. On an exchange, market makers or specialists can tap into reserve shares to even out imbalances during the trading day.
Unless imbalances become so severe that the exchange suspends trading, a typical situation fitting the description of buyers or sellers on balance most likely would occur before the market opens or at the expiration of an option contract, when circumstances impede liquidity.
The speed and volume of market orders in a relatively liquid exchange makes large imbalances unlikely to remain in place for any significant duration. For example, as news of an impending buyers on balance situation spreads, some stockholders may use the rising prices triggered by rising demand as an opportunity to sell shares they would otherwise have held, adding liquidity to the market.