Picking up on the lovely work put forward by esteemed wrinkle-brained Ape, python wrangler, and nomadic oceanic mammal, wanderlust_dolphin, as well posts and comments from a few other banana addicts, I thought I’d have a morning dig into this order imbalance / auction stuff while sipping tea and eating these delightful wafer cookies.

It’s all written in that common confusing kind of way but I’ll talk my way through it and maybe bits will line up and make sense.

What we’re looking at is the large volume of order imbalances reported for both open and close of NYSE. This is a pretty normal thing, and its handled with an ‘auction’ in the final minutes of the session. There are a thousand or so tickers that get this treatment every day.

Apparently this is really growing, up to 10% of the day’s trades are getting resolved this way.

What seems not normal is a price change of 40%, more on that in a bit.

The info on NYSE is a bit dry but it talks about actually having a floor caller working with dealers during the auction. So for 10 minutes every day it’s like the 80s. I’ll dig out my suspenders. Supposedly this guy uses some ‘discretion’ to arrive at clearing the imbalances. Hmmm.

TLDR VERSION:

Imbalances are normal and are resolved with an auction in the final 10 minutes. Having imbalances on the buy side is better. It means that more people are buying than selling, so this should move price. All this is handled with ‘reserve liquidity’ and that’s likely why the prices don’t hit the tape — liquidity comes from DP.

WTF are Opening / Closing Order Imbalances

Take it away, Investopedia

They go on to say that the MM can bring liquidity in from a ‘reserve’ to balance demand (so: darkpools and possible shenanigans) and that imbalances are resolved in minutes.

There is historical data available for purchase — a second project here could be to see if there is some kind of relationship between order imbalances at open / close and big movement in volume / price.

This page on the ‘Closing Auction Imbalance Tool’ gives more clarity with an example. Notice the example shows only a 1% or so discrepancy in price — bit different than the 40% we saw on Friday, eh?

The auction is the last 10 minutes of the day and what the three charts basically just show the imbalance total at specific times, then the paired totals, then the pricing, as it all gets cleared.

If you give it a read you’ll appreciate that the Continuous Book Clearing Price is referred to as ‘the price at which all better-priced orders that are eligible to trade in an Auction on the Side of the Imbalance of such orders can be traded.’ Yeah, better-price for who? Obviously for the MM who’s controlling this event.

The big question is why is there a 40% discrepancy in price at the close?

Uh, can we have that $32 price please?

I had an explore and while there are a lot of tickers that show up as part of the auction to resolve order imbalances — none of them have a price discrepancy of 40%. (40%!)

Between 15:55 and 15:57 there were 3.8 million shares traded at around $30.

Revisiting what was said earlier: the MM will bring in liquidity from a ‘reserve’. I think this is why we don’t see the price hit the tape, these trades are internalised in the DP.

But it means that someone is paying that much. And all just in the last 5 minutes of the day. Bringing the price down on nearly 4 million shares sure feels like shenanigans but what if this has opened the box…

Alright. Turn it 🆙

We know that there was an insane level of volume right at the close, so could this be just the start of mega flow to come next week?

One of the spicier theories out there is that BR runs nearly the entire market on algos (seems likely). The theory goes that periodically they force the MM and HF to cover shorts because there’s too much tied up in extremely shaky and over-leveraged, chossy collateral. Some of the recent headlines confirm just how over exposed the whole thing is. According to the theory, when the algo switches to its macro cycle (basically just like Wyckoff accumulation / distribution), it’ll pull liquidity from the dark pools to flood the tape with buy or sell orders. The hyped date for this macro algo switch has been ‘End of August’.

The jump in volume, price, and this imbalance bidness feels promising, even if we don’t consider the spicier tin foil timelines and theories. At least we can see that our volume can come back.

Next week there’ll be earnings but also employment data and the employment data isn’t going to be good, it’s been fudged and Powell didn’t say a word about it last week. Volatile days are ahead but let’s hope that what we’re seeing with this order imbalance stuff is the spark to the fuse.

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