Opening gap limits and close imbalance orders

Orders before the opening print

An opening auction strategy is a pre-open procedure that posts buy and short-sale limits priced for gap openings rather than a fair print, then manages any fills in the first minutes after the opening auction. Opening-auction orders are entered before the listed opening print as both buy and short-sale limits, with those limits computed premarket from the gap from the prior close, the distance between the opening print and the previous official close.

The opening procedure seeks fills only when the print is a gap price, not when the stock opens at a price judged fair given market conditions. A stated opening-auction assumption is that a fill at the gap price also fills the listed specialist at the same price and in the same direction.

An illustrated opening book posts 2,000 shares to buy and 2,000 shares to sell short in about 50 names and targets a 10-15% fill rate, or about five to eight names. Fill rate is the share of pre-open orders that actually execute when the open prints away from a fair price.

After an opening fill, profits are taken with an automated program or losses are covered. The opening procedure is typically complete within five to ten minutes.

Imbalances into the closing print

A closing auction strategy is an end-of-day procedure that reads published close imbalances, participates in the same direction, and finishes inside a short window before the closing print. Closing-auction work begins with market-on-close imbalances published starting 20 minutes before the close. Larger buy or sell imbalances are filtered and orders are placed in the same direction. A close imbalance is excess buy or sell interest already committed to the closing print and disclosed before that print.

During that final 20 minutes, market-at-close orders can be submitted to close or offset the published imbalance, and size can be reduced for a profit or increased as conditions change. A market at close order is an order intended to trade at the official closing price, used here to add to or offset a published close imbalance in the last minutes of the session.

Usable capital and a short schedule

The described auction procedures are presented as needing about $1 million of usable capital so many names can be quoted at once, whereas a $25,000 retail balance would be exhausted by buying 1,000 shares of a $50 stock. Use of capital is capital reserved so many names can be quoted at once without concentrating the book in a single position.

Because the opening window is brief and the close window is about a half hour, the two auction procedures can be scheduled around other work, including a Pacific-time session that opens at 6:30 a.m. and closes at 1:30 p.m.