Understanding Imbalances

If you were watching the IBM tape late in the day, the stock started to sell-off significantly around 3:45 ET, and then gapped down on the closing print to close at $202.72.  What happened?

Your answer is a large sell imbalance was posted by the NYSE at 3:45 pm ET.  These sell imbalances are published every day at this time, and sometimes they can have a major influence on the price of the stock.

The designated market maker (DMM) on the floor of the NYSE continuously logs all the buy MOC (market on close) orders, and all the sell MOC orders, on their security.  And then at 3:45 PM ET, this information is disseminated to the market.  (It is a good idea to check with your data provider, to make sure they carry the imbalance feed).

Large buy imbalances will typically press the stock higher, where large sell imbalances will typically press the stock lower.

In the IBM example, traders subscribing to the imbalance feed, seen the sell imbalance at 3:45, and then began selling the stock, with the expectation that the closing MOC sell orders would press the stock lower.  It worked perfectly in the case of IBM today, as the stock gapped down on the closing print.

It is not always that simple however.  In this HFT world, many algorithmic systems will manipulate these closing imbalances, and sometimes in the last minute or two they will flip, causing a sell imbalance to go to a buy imbalance.  If that happens it catches many imbalance traders by surprise.

Sometimes these imbalance plays get crowded as well.  And if too many imbalance players are on the same side of the trade, the imbalance could also flip.

In any regard, funny things happen after 3:45 in NYSE issues, and if you don't subscribe to the imbalance feeds, you might be missing some pretty important information.