Order Imbalance

80-20 Rule

What is a command imbalance?

Order imbalance is a situation resulting from an excess of buy or sell orders for a specific security on an exchange market, which makes it impossible to match the orders of buyers and sellers. For securities supervised by a market maker or specialist, stocks can be imported from a specified reserve to add liquidity, temporarily eliminating excess orders from inventory so that trading in the security can resume at an orderly level . In extreme cases of order imbalance, trading may be suspended until the imbalance is resolved.

Understanding order imbalances

Order imbalances can often occur when important news arrives on a title, such as a results release, a change of focus or a merger and acquisition. Imbalances can move stocks up or down, but most imbalances are corrected in minutes or hours in a single daily session. Smaller, less liquid securities can have imbalances that last longer than a single trading session because there are fewer stocks in the hands of fewer people.

Key points to remember

  • Order imbalances exist when there is an excess of buy or sell orders for a specific security.
  • Most order imbalances are short lived but can last for hours and even all day.
  • Using limit orders rather than market orders can help alleviate some of the buying or selling problems with order imbalances.

Investors can protect themselves from volatile price changes that may result from order imbalances by using limit orders when trading trades, rather than market orders. A market order is simply a buy or sell order at the best price available at the time, while a limit order is an order where the investor wants to buy or sell at a specific price.

Special considerations

Other incidents that can lead to order imbalances include information leaks or rumors that could affect the actions of a public company. For example, legislation may gain momentum and may affect the business operations and business model. Companies using newer technologies and platforms that have gone beyond existing laws may be particularly sensitive to this, as regulators are catching up and, in doing so, are introducing rules that can reduce their profit margins.

As each trading day draws to a close, order imbalances can arise when investors rush to lock stocks near the closing price. This can especially come into play if the share price is seen at a discount that day.

Investors who wish to avoid buying or selling amid such order imbalances could try to synchronize their orders before the wave of buyers and sellers who could enter.

If there is notification of an order imbalance with too many buyer’s orders, the holders of shares could seize the opportunity to sell part of their shares and take advantage of the increased demand. The hope is that they could see a lucrative return on investment with potentially higher prices. Conversely, buyers could try to take advantage of a glut of sell orders when prices were temporarily reduced due to the imbalance.

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