Opening & Closing Auctions – The Stock Market

At the beginning and end of a trading day, a so-called “auction” or “cross” takes place. This is a mechanism where all buyers and sellers are gathered in the order book as a single pool. This pool converges around the level where buyers and sellers are prepared to meet to execute trades.

Instead of the stock price opening or closing based on the level of the last executed trade, the price opens/closes where the highest turnover occurs—that is, the price where the most buyers and sellers meet. This price is called the equilibrium price.

The purpose of these auctions (often referred to as the Opening Cross and Closing Cross) is to achieve high liquidity, which clearly indicates the stock’s current market price, i.e., the price at which the most buyers and sellers are willing to transact.

• Opening auction (Opening Cross): Occurs at exactly 9:30 AM ET.
• Closing auction (Closing Cross): Occurs at exactly 4:00 PM ET.

When the auction is finished, the majority of buyers and sellers trade at the determined equilibrium price. This is the stock’s official opening or closing price for the session.

Since this is a closing auction, the stock closes at the determined equilibrium price. If it had been an opening auction instead, the day’s trading would have started at that same equilibrium price.

How to trade the auction

To ensure you get to buy shares in the auction, you place your buy order slightly above the level where the equilibrium price is currently located. If the stock’s equilibrium price in the ongoing auction is, for example, $50, you can place your buy order at $60. When the auction concludes, you will purchase shares at the determined equilibrium price. If the equilibrium price does not change in this case, you will buy the shares for $50 each, even though you placed your buy order at $60.

The same principle applies regardless of whether you want to buy in the opening or closing auction.

If you instead want to sell in the opening or closing auction, you place your sell order slightly below the current equilibrium price.

Volume

These auctions make it appear as if very large volumes are passing through the market, especially in the closing auction. While this is true, because all trading during the auction is concentrated into a single minute, it always looks like an unusually high amount. However, it is common for large institutional players to execute their trades during the auction, which can cause volumes to explode in the closing auction at times.

Skilled traders can identify if a mispricing is likely to occur in the auction and use it to their advantage to make a profit.