What Is an Imbalance of Orders?

Imbalance of orders is when too many orders of a particular type—either buy, sell, or limit—for listed securities and not enough of the other, matching orders are received by an exchange. An imbalance of orders is also referred to as an "order imbalance."

Key Takeaways

  • An imbalance of orders is when a market exchange receives too many of one kind of order—buy, sell, limit—and not enough of the order's counterpoint.
  • For sellers to complete their trades, there must be buyers and vice versa; when the equation is slanted too heavily in one direction, it creates an imbalance.
  • If the imbalance happens ahead of the regular start of trading, trading on that particular security may be delayed.
  • If the imbalance happens during regular trading and the shares are monitored by a market specialist, extra shares may be distributed from a reserve to goose the liquidity of the security.
  • If the imbalance becomes too unwieldy during the trading session, the trading on that particular security may be halted until the imbalance has been corrected.

Understanding an Imbalance of Orders

Shares experiencing an imbalance of orders may be temporarily halted if trading has already commenced for the day. If the imbalance occurs prior to the market open, trading may be delayed. Better-than-expected earnings or other unexpected good news can result in a surge in buy orders in relation to sell orders. Likewise, unexpected negative news can bring a large sell-off.

For securities that are overseen by a market maker or specialist, shares may be brought in from a specified reserve to add liquidity, temporarily clearing out excess orders from the inventory so that the trading in the security can resume at an orderly level. Extreme cases of order imbalance may cause suspension of trading until the imbalance is resolved.

Why an Imbalance of Orders Occurs

Imbalances of orders can often occur when major news hits a stock, such as an earnings release, change in guidance, or merger and acquisition activity. Imbalances of orders can move securities to the upside or downside, but most imbalances get worked out within a few minutes or hours in one daily session.

Smaller, less liquid securities can have imbalances that last longer than a single trading session because there are fewer shares in the hands of fewer people. Investors can protect themselves against the volatile price changes that can arise from imbalances by using limit orders when placing trades, rather than market orders.

As each trading day draws to a close, imbalances of orders can arise as investors race to lock in shares near the closing price. This can especially come into play if the stock price is seen at a discount on that particular trading day.

Investors who want to avoid such order imbalances might try to time their orders in advance of the wave of buyers and sellers that may come in late in the session.

Special Considerations

Other factors that can lead to imbalances of orders include legislation that gains momentum, which could affect a company’s operations and business model. Companies that use newer technology and platforms that have outpaced existing laws may be particularly susceptible to this as regulators play catch-up and in the process introduce rules that can cut into their profit margins.

If there is a notification of an imbalance of orders with too many buyer orders, holders of the stock might seize the opportunity to sell some of their shares and take advantage of the increased demand and realize a lucrative return on investment. Conversely, buyers might attempt to take advantage of an overabundance of sell orders.