Market Overview

Why Stock Exchange Floor Closings Could Be Creating End-Of-Day Volatility

Why Stock Exchange Floor Closings Could Be Creating End-Of-Day Volatility

The New York Stock Exchange closed its trading floor this week in response to the COVID-19 pandemic, and the decision may be having a subtle impact on trading action in the market.

On Friday’s Benzinga PreMarket Prep, co-host Dennis Dick said the floor shutdown is ramping up market volatility in the opening and closing hours of the trading day.

Trading Imbalances

Dick said floor brokers typically help manage opening and closing imbalances in order flows.

“These imbalances actually start coming out on the floor as early as 2 p.m. The public feed comes out at 3:50 p.m., but all the floor traders kind of know where they are, so they’ve already priced the market in,” Dick said.

An order imbalance occurs when the amount of buy or sell orders in a particular stock far outweighs demand for the other side of the trade, making it difficult to match buyers and sellers. These imbalances often occur right at the market open or right before the close as investors take positions for the current or following day.

Retail traders can get access to opening and closing imbalance data via a direct feed from Nasdaq or a subscription to a data broker.

10-Minute Scramble

Without floor brokers, Dick said the market has only 10 minutes to digest the closing balance data before the 4 p.m. close.

“It’s new information. That’s why these violent swings are happening at 3:50 p.m. when we finally get the closing information, because there’s no floor brokers there,” he said.

Dick said the financial market media has been attempting to find fundamental explanations for these late-day swings, but the fact that they have been happening right at 3:50 p.m. is likely no coincidence.

“The algos see that. They’re on it instantly. Buy imbalances? Boom, buy stocks,” he said.

High-frequency trading algorithms are essentially identifying buy or sell imbalances at 3:50 p.m., taking the winning side of the trade immediately and then closing out the trade right before the market closes at 4 p.m.

This trading pattern helps explain huge closing moves in relatively low-beta stocks this week, such as Procter & Gamble Co (NYSE: PG) and Verizon Communications Inc. (NYSE: VZ).

Dick said opening imbalances, which come out at 8 a.m., can be influential as well.

“When you see huge buys across the board, that’s going to be moving the market. That moves the S&P, that moves the stocks. They obviously move in tandem with each other. And that’s why you had a big pop yesterday into the close. You had some huge buy imbalances,” Dick said.

Benzinga’s Take

Traders are understandably paying close attention to the trading patterns in the SPDR S&P 500 ETF Trust (NYSE: SPY) looking for any signal that the COVID-19 bottom is in or that stocks could soon be making new lows. However, trading action in the first 15 minutes and last 15 minutes may not be as reliable as it typically is as long as the stock exchange floors are closed.

Do you agree with this take? Email with your thoughts.

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