Opening Cross

What Is the Opening Cross?

The opening cross is a method the Nasdaq uses to determine the opening price for an individual share of the stocks that trade on its exchange. This method accumulates data on the buy and sell interest among market participants for a particular security two minutes before the market opens. The Nasdaq makes this information available to all investors.

According to Nasdaq, the opening and closing cross processes give all investors access to the same information, and ensures their orders get the same treatment. This brings fairness and transparency into the marketplace. It also efficiently matches buyers and sellers to ensure market liquidity (that is, the ability for investors to find ready purchasers if they need to sell their positions quickly).

Understanding the Opening Cross

However, things can change in the world of share prices at any time—even when a stock exchange like Nasdaq is technically closed. Events and news announcements that occur outside those hours can cause the stock to open lower or higher in the morning than where it closed the day before. As a result, many retail and even professional traders won’t execute orders too near the open or close of a market, especially with market orders (those to be executed immediately), fearing volatility to either the upside or downside.

The opening cross tries to limit such volatility, by reflecting the change in sentiment regarding a stock between the closing price the day before and the opening price in the morning. In this way, it prevents surprises shortly after the "market open"—that is, when the Nasdaq exchange opens for business—which is typically one of the most active trading periods. This gives investors greater confidence that the quoted price fairly reflects supply-and-demand conditions within the first minutes of the trading day.

How the Opening Cross Works

Nasdaq's regular trading hours are between 9:30 a.m. and 4:00 p.m. Eastern time, Monday through Friday. However, Nasdaq accepts trade requests for several hours after the market closes and several hours before it opens.

The opening cross process consolidates all of these requests, conducting an auction process. Buyers and sellers place offers and counteroffers until prices match, resulting in a trade. The objective is to achieve maximum execution by getting the greatest number of shares of a given security to trade at a single price.

Nasdaq makes the resulting data available electronically. This gives market participants a greater window into the bid-ask spread, and identifies any order imbalances, meaning situations where buyers and sellers cannot be matched.

Example of an Opening Cross

Under the open-cross system, price matches use a 10% threshold, or buffer, to calculate the opening price of a stock.

For example, if a buyer offers $100 per share for a given stock and a seller wants $110, the midpoint of the offer is $105. This midpoint 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's price, moving it to $99.50. This tells investors that the opening price for the shares in question is between $99.50 and $110.50.

The opening cross performs this type of calculation for all stocks and provides updated information to potential buyers and sellers every five seconds electronically.

Additionally, the open cross system shows detailed information about the prices at which orders are expected to 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 then place additional trades, which the system also incorporates.