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> That misled the exchange’s computers to treat the 9:30 a.m. opening bell as a continuation of trading, and so they skipped the day’s opening auctions that nea

> That misled the exchange’s computers to treat the 9:30 a.m. opening bell as a continuation of trading, and so they skipped the day’s opening auctions that neatly set initial prices. I didn't even know about this process. I don't know much about trading, but it surprises me that there is a separate process for setting prices at the start of trading, and that if it's missed, chaotic prices result. Is this related to how stock markets aren't really ever open 24 hours? Do they need that reset to function in stable way?

xyzelement 4y ago
That's right. In short it's something like this: stocks trade on their primary exchanges during specific hours. For example 9:30 to 4 in the US. Part of it is legacy from when trading was done by actual humans being at the exchange physically to trade during those times and part of it (I would guess is still the case) is to allow plenty of non-trading hours for back-office jobs and settlement. So yes there's a special start of day process that runs at 9:30 that runs through all the orders on the books at that time and determines a price at which some optimal set of those orders can trade, trades them at that price, and also posts that price as the Open price for the day. The process is different during continuous trading since orders are one by one matched against the order book. Source: ran one of the world's largest equity platforms for 5 years.
- ajoseps 4y ago
  isn't there another component to the NYSE auction where the DMM has some input into what the closing/opening price actually is?
  - khold_stare 4y ago
    Yes. In my reply to the first comment I mentioned setting the opening price is "more complicated". Every exchange has their own system for the opening auction which you buy into when you list with a particular exchange. Most exchanges have an algorithmic way of calculating the price. For NYSE, it's again more historical. A Designated Market Maker (DMM) for a stock technically determines the opening price. There is a person physically on the NYSE trading floor who represents the DMM firm who technically opens the different stocks. They have a weird custom keyboard from NYSE for this purpose... The price is usually calculated algorithmically by the DMM firm and sent to the person at NYSE to approve. Pretty arcane. Also somewhat shady, as the DMM firm can be and is part of the auction themselves. DMM firms can analyze the order book to see what the imbalance is in the overlapping region, and place an order of their own to correct the imbalance and then set the opening price. I can see how one can profit from this in certain situations
    - ajoseps 4y ago
      I didn't realize the floor broker was actually involved with setting the opening price. I always wondered what the incentive was to access floor feeds for opening auctions
khold_stare 4y ago
Worked in HFT for a few years. The reason why most markets are not open 24 hours is more human, and just historical - aligned with people's 9-5 workday. There are also pre open and post close sessions of trading but it's much less liquid. Futures markets are open almost 24 hours. Even there, it's down for some time daily. Personally I think it's actually inertia that keeps existing markets this way - the systems of the exchanges and participants were designed with the assumption that they will have daily downtime, so it's hard to change. It's also dependant on how banking and settlement works - a lot of stuff happens after the trading ends. Batch processes run as different institutions settle their trades between each other, etc etc. Now, as a result, there needs to be a way to set the opening price and closing price, like a bootstrap process. A smaller version of this process actually happens every time a stock gets halted and resumed. An exchange has an order book - orders of things people want to buy and sell at different prices. During normal operation the buy and sell orders don't overlap in the order book - if two people want to buy and sell at the same overlapping price, they just get matched by the exchange at that moment. Unmatched orders stay in the order book data structure until a matching order comes along. The "price" you see in charts is just the midpoint between the highest buy and lowest sell price in the order book. Now, if the order book is empty, what the heck is the price? That's what the opening auction needs to solve. The way it works is that people can start placing orders ahead of the opening bell, but they won't get matched until the open. So before the open, the order book is getting filled with orders, but crucially the _orders will overlap_. This "crossed" order book is a no no during normal trading, but ok before the opening auction. When the auction comes, a price is picked which maximizes the amount of orders filled (it's more nuanced than that, but bear with me). Imagine you pick a price in the overlapping region of the order book - every buy order that has a higher price than that will match with every sell orders that has a price lower than that. They will get matched and executed at the opening price, and BAM, you have an uncrossed order book, full of orders. If the auction doesn't happen, and you just open the stock, then all hell breaks loose. Many things can go wrong here. Firms connected to the exchange may have code that assumes a book is not crossed (or at least not as crossed as it would be during an auction) causing wild behavior. The exchange itself could start matching orders haphazardly in the overlapping region, causing those "price swings" that the article talked about. Can't imagine the panic that day haha.
toast0 4y ago
FYI, there's a similar auction for closing, too. The closing price isn't just a race for the last trade under the buzzer; there's a process where at some number of minutes before close, you can put in orders for close or realtime, and then magic happens.

xyzelement 4y ago

That's right. In short it's something like this: stocks trade on their primary exchanges during specific hours. For example 9:30 to 4 in the US. Part of it is legacy from when trading was done by actual humans being at the exchange physically to trade during those times and part of it (I would guess is still the case) is to allow plenty of non-trading hours for back-office jobs and settlement. So yes there's a special start of day process that runs at 9:30 that runs through all the orders on the books at that time and determines a price at which some optimal set of those orders can trade, trades them at that price, and also posts that price as the Open price for the day. The process is different during continuous trading since orders are one by one matched against the order book. Source: ran one of the world's largest equity platforms for 5 years.

ajoseps 4y ago
isn't there another component to the NYSE auction where the DMM has some input into what the closing/opening price actually is?
- khold_stare 4y ago
  Yes. In my reply to the first comment I mentioned setting the opening price is "more complicated". Every exchange has their own system for the opening auction which you buy into when you list with a particular exchange. Most exchanges have an algorithmic way of calculating the price. For NYSE, it's again more historical. A Designated Market Maker (DMM) for a stock technically determines the opening price. There is a person physically on the NYSE trading floor who represents the DMM firm who technically opens the different stocks. They have a weird custom keyboard from NYSE for this purpose... The price is usually calculated algorithmically by the DMM firm and sent to the person at NYSE to approve. Pretty arcane. Also somewhat shady, as the DMM firm can be and is part of the auction themselves. DMM firms can analyze the order book to see what the imbalance is in the overlapping region, and place an order of their own to correct the imbalance and then set the opening price. I can see how one can profit from this in certain situations
  - ajoseps 4y ago
    I didn't realize the floor broker was actually involved with setting the opening price. I always wondered what the incentive was to access floor feeds for opening auctions

khold_stare 4y ago

Worked in HFT for a few years. The reason why most markets are not open 24 hours is more human, and just historical - aligned with people's 9-5 workday. There are also pre open and post close sessions of trading but it's much less liquid. Futures markets are open almost 24 hours. Even there, it's down for some time daily. Personally I think it's actually inertia that keeps existing markets this way - the systems of the exchanges and participants were designed with the assumption that they will have daily downtime, so it's hard to change. It's also dependant on how banking and settlement works - a lot of stuff happens after the trading ends. Batch processes run as different institutions settle their trades between each other, etc etc. Now, as a result, there needs to be a way to set the opening price and closing price, like a bootstrap process. A smaller version of this process actually happens every time a stock gets halted and resumed. An exchange has an order book - orders of things people want to buy and sell at different prices. During normal operation the buy and sell orders don't overlap in the order book - if two people want to buy and sell at the same overlapping price, they just get matched by the exchange at that moment. Unmatched orders stay in the order book data structure until a matching order comes along. The "price" you see in charts is just the midpoint between the highest buy and lowest sell price in the order book. Now, if the order book is empty, what the heck is the price? That's what the opening auction needs to solve. The way it works is that people can start placing orders ahead of the opening bell, but they won't get matched until the open. So before the open, the order book is getting filled with orders, but crucially the _orders will overlap_. This "crossed" order book is a no no during normal trading, but ok before the opening auction. When the auction comes, a price is picked which maximizes the amount of orders filled (it's more nuanced than that, but bear with me). Imagine you pick a price in the overlapping region of the order book - every buy order that has a higher price than that will match with every sell orders that has a price lower than that. They will get matched and executed at the opening price, and BAM, you have an uncrossed order book, full of orders. If the auction doesn't happen, and you just open the stock, then all hell breaks loose. Many things can go wrong here. Firms connected to the exchange may have code that assumes a book is not crossed (or at least not as crossed as it would be during an auction) causing wild behavior. The exchange itself could start matching orders haphazardly in the overlapping region, causing those "price swings" that the article talked about. Can't imagine the panic that day haha.

toast0 4y ago

FYI, there's a similar auction for closing, too. The closing price isn't just a race for the last trade under the buzzer; there's a process where at some number of minutes before close, you can put in orders for close or realtime, and then magic happens.