What it means
At the open, buy and sell orders do not always balance. If more investors want to buy than sell at the indicative price, the auction has an imbalance of buy orders, and the reverse is also possible.
An opening imbalance only order lets a trader offer to take the other side of that surplus. The order is passive in a specific sense.
It joins the auction only if an opposite-side imbalance exists, and it is executed only up to the size of that imbalance. Any part that cannot be matched is not carried into the day's continuous trading but is cancelled, depending on the rules of the exchange.
Market makers and large institutions use such orders because they offer a chance to trade at the official opening price without moving the market. A trader who is comfortable selling at the opening price if buyers are plentiful can submit an order that fills only when that situation arises.
In return, the auction gets extra liquidity, which tends to narrow the imbalance and stabilise the price. The details depend on the venue.
Different exchanges define the order slightly differently, set different cut-off times and apply different priority rules, so it is important to read the specific rulebook. The label OIO is associated with certain markets and may not be used everywhere.
Compare it with other opening orders. A market-on-open order trades at the opening price regardless of the imbalance and is therefore certain to execute, while an imbalance-only order gives up that certainty in exchange for acting only when the market needs the shares.
Risk control is still necessary. Since the fill depends on the size of the imbalance, a trader cannot be sure how much of the order will execute, so the order is best used as part of a wider plan.
It is not a substitute for ordinary orders when a certain fill is required.
In practice
Real-world examples.
Example
A market maker sees a large surplus of buy orders before the open and submits an opening imbalance only order to sell. The auction fills it up to the size of the surplus at the opening price. The firm earns a modest profit for supplying the shares. If the opening price proves too low, however, it can lose money on the position afterwards.
Example
An asset manager wants to reduce a holding but only if there is strong demand at the open. She enters an order of this type for 40,000 shares. When no buy imbalance appears, the order does not execute and she keeps the position for another day.
Example
A hedge fund wishes to buy shares if sellers are anxious at the open. It uses the order to meet a sell imbalance, which helps the market find a price and gives the fund its shares without moving prices further. The fund's finance team then books the purchase at the official opening price.
Formula
Calculation
Executed quantity = the smaller of (order size) and (opposite-side imbalance)
Unexecuted quantity = order size - executed quantity
A trader enters an opening imbalance only order to sell 30,000 shares. The opening auction shows an imbalance of 20,000 shares to buy at an indicative price of $15, so executed quantity = 20,000 shares. Proceeds = 20,000 x 15 = $300,000. Unexecuted quantity = 30,000 - 20,000 = 10,000 shares, which is cancelled under the rules assumed here.Case study
Seen in the real world.
Windward Securities is a fictional trading firm that kept an eye on opening auctions for large listed companies. One morning, strong news overnight left an indicated imbalance of 60,000 shares to buy in a particular stock.
The firm's trader had pre-positioned an opening imbalance only order to sell 100,000 shares. It executed for 60,000 shares at the opening price, and the remaining 40,000 shares were cancelled, as the firm expected.
In this illustrative story the trade added liquidity at the moment it was most needed, and the firm used the proceeds of 60,000 shares at the auction price to cover its risk. The desk head reminded the team that partial fills are normal for this order type, and that the unfilled amount needs a separate plan. The firm's risk team also confirmed that the position stayed inside its overnight exposure limits.
Watch out
Common mistakes.
- Expecting a full fill, when the order executes only up to the size of the opposite imbalance.
- Assuming unfilled shares carry on into continuous trading, when they are normally cancelled.
- Treating the order as available on every exchange in the same form, when the name, the cut-off times and the rules are specific to certain venues.
Questions
People also ask.
Why would a trader use an imbalance-only order?
To provide liquidity at the official opening price when the auction is lopsided, without taking on risk when it is balanced.
Does the order affect the opening price?
It can reduce an imbalance and so help stabilise the price, because it adds shares to the lighter side of the auction.
Who uses these orders most often?
Market makers, institutions and proprietary trading firms, since they need the skills and systems to use auction-based orders properly.
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