Price Determination at NYSE: The Auction Approach

Price Determination at NYSE: The Auction Approach

6 Min.

The New York Stock Exchange (NYSE) still relies on a modern-day, auction-style format to determine opening and closing prices, which are influenced by supply and demand factors. Before the market officially opens, Market-on-open (MOO) and limit-on-open (LOO) orders may be accepted, but they only trade during the opening auction. In certain situations where events occurred while the exchange was closed and are expected to significantly impact the security's price, NYSE officials may disregard the stock's previous closing price and adjust the starting trading price for the following day.

Basics

The New York Stock Exchange, known as NYSE or "the Big Board," is the United States' most ancient and largest stock market. It evokes the traditional image of traders vociferating price offers and executing vigorous hand signals during the open outcry system's live securities auction process.

Although contemporary electronic trading technology predominantly underpins high-speed, high-volume transactions, human traders continue to wield considerable influence within these trading arenas. The NYSE's methodology for determining opening and closing prices remains rooted in contemporary supply and demand dynamics, presented in a modern-day auction-style framework.

The NYSE Opening Auction

The NYSE's opening auction, a pivotal event in the trading day, commences promptly at 9:30 a.m. Eastern Time (ET). It marks the official start of trading activities. However, it's worth noting that only NYSE members can enter orders to buy and sell securities as early as 6:30 a.m. ET.

Pre-market orders are accepted before the market officially opens. Nevertheless, two specific order types, Market-On-Open (MOO) and Limit-On-Open (LOO), are exclusively executed during the opening auction. MOO orders aim to acquire shares at the prevailing market price at the opening bell, while LOO orders specify a desired quantity of shares at a predetermined price. If the fixed price isn't met, the trade remains unexecuted.

The commencement of the trading day unveils the initial data stream, featuring reference prices for each security, typically mirroring the previous night's closing prices. This data stream also reveals the current buy-sell order imbalance and corresponding prices. By disclosing this information, the NYSE equips traders with valuable insights to align their trades with market dynamics.

Per the NYSE's official website, historical TAQ order imbalance data is released at specified intervals: five-minute intervals until 9 a.m. ET, followed by one-minute intervals from 9 a.m. ET to 9:20 a.m. ET, and finally, 15-second intervals from 9:20 a.m. ET to 9:35 a.m. ET. In the minutes leading up to the opening auction, the anticipated opening price for each security becomes part of the publicly available data stream, providing traders with crucial information to inform their trading strategies.

Price Adjustments and Market Operations at the NYSE

In stock trading, price adjustments play a crucial role, particularly in response to unforeseen events that can significantly impact security values. One such instance is when late-breaking news emerges after the market's closing hours, potentially causing dramatic shifts in a company's stock price when the market reopens the next day. In such scenarios, NYSE authorities may exercise discretion to disregard the previous day's closing price and implement a necessary adjustment to establish the new reference point for the upcoming trading day.

The responsibility for executing this price adjustment falls upon the shoulders of designated market makers (DMMs), each assigned to oversee trading activities for specific securities listed on the NYSE. DMMs wield the authority to make price adjustments with the primary goal of maintaining liquidity in the market. Additionally, DMMs possess the capability to temporarily postpone the commencement of trading for a particular security to ensure an orderly market environment. Furthermore, DMMs must purchase securities if required, thereby upholding the market's seamless operation.

The trading day officially kicks off at 9:30 a.m. ET when DMMs initiate trading for the securities under their purview, undertaking this task officially. Notably, the opening of trading for an individual security can be delayed if deemed necessary without impacting the trading of other securities. Once security enters the trading arena, its price is determined by the interplay of three key factors: supply, demand, and the latest news developments. A trade materializes when the highest bid price aligns with the lowest asking price.

To aid DMMs in their role, electronic trading entities known as Supplemental Liquidity Providers (SLPs) come into play. SLPs carry a financial incentive to enhance market liquidity by maintaining bid and offer prices at or above the National Best Bid and Offer (NBBO) price for their assigned securities for at least 10% of the trading day. The NBBO represents the highest bid and the lowest ask price available for a given security.

The NYSE Closing Auction

As the trading day draws to a close, the NYSE orchestrates a closing auction, a process resembling its morning counterpart. While the NYSE officially ceases trading at 4 p.m. ET, pivotal orders contributing to the day's closing price arrive before the market opens, with trading opportunities available from 6:30 a.m. ET, mirroring the opening auction's schedule.

As specific order types are crucial to establishing opening prices, two distinct order categories also influence the determination of closing prices: Market-On-Close (MOC) and Limit-On-Close (LOC) orders. MOC orders aim to secure shares at the prevailing market price during the market's closing moments, while LOC orders specify a desired share quantity at a predetermined closing price. Unmet price requests result in unexecuted trades.

In addition to standard orders that commence at the market's official opening at 9:30 a.m. ET, another category, the Closing Offset (CO) Order, plays a vital role in the closing price calculation. CO orders, defined as limit orders, exclusively execute to counterbalance any buy/sell disparities, enhancing trading fluidity and market liquidity.

Trade imbalance information begins disseminating at 3:50 p.m. ET, reported every second if it differs from the previous posting, until the 4 p.m. ET market closure. During this brief window, data regarding trading volume, matched trades, trade imbalances, and pricing emerges. This data offers valuable insights into price trends and market interest in various securities. At 3:58 p.m. ET, MOC and LOC orders become irrevocable, and at precisely 4 p.m. ET, the trading day concludes.

Conclusion

Setting opening and closing prices extends beyond mere auctions. This process constitutes a deliberate endeavor to streamline trading in a multifaceted market landscape. Within the auction market, cutting-edge technology, human interaction, and specialized terminology converge to construct an efficient arena for business transactions. This synthesis harmoniously integrates a vast array of trade requests from diverse investors, all occurring in real time. Most notably, for investors, this procedure unfolds seamlessly and with immediate results.

New York Stock Exchange (NYSE)
Market-on-Open (MOO)
Limit-on-Open (LOO)
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