05-Dec-2020: I have been asked to explain, on a number of occasions (not on this site so much, but in real life, and on other sites that I previously frequented), the purpose of the ASX daily opening and closing auctions, and how they work. I did my best. However, I came across the following explanation this morning, and it is very well written, and easy to understand, so I thought I'd share it with you. I'll tell you where I found it at the end, and give them a plug.
ASX Opening and Closing Auction
Trading Hours
The ASX trading day runs from 10 am until 4 pm. That is when the market is open and active. But there are a few caveats to those times.
Firstly, the ASX operates under a staggered open, which is controlled alphabetically… the A’s open first and the Z’s open last. The staggered opening times are as follows;
Secondly, there is ‘pre-open’ period from 7 am to 10 am each morning, where bids and offers (orders) can be submitted but no trading occurs. This allows market participants (instos, funds, brokers, individuals) to enter buy and sell orders at the prices they want to transact at. [for buys, the maximum they are prepared to pay, for sells, the minimum they are prepared to accept]
Opening Market Auction
For example, I might see that iron ore was up strongly overnight and form a bullish opinion on BHP. If BHP closed at $30 yesterday, then I might place a limit order up to $31. In this instance, I am telling the market that I will pay up to $31 for my desired number of BHP shares - but no more - and by submitting that order, I am placed in the queue at the relevant price.
If there is a seller on the other side, willing to take $31 or less, then I will get filled. If there are a mountain of people willing to pay more than $31 however, and they have submitted bids as such, then I will miss out.
The ASX employs a matching algorithm to determine the price point at which demand will net out supply in the opening market auction. This is the price that the stock will open at and is the official opening price on the day. Sometimes (oftentimes) the price on the open will be different than the price from the prior session’s close, and that because of the bids and offers which have been submitted in between and the opening match described above.
Closing Market Auction
At 4 pm, regular trading on the ASX ceases and a closing market auction, similar to the opening market auction, occurs. Why have an auction? Well, for the opening market auction it is all about determining an opening price given that events have occurred whilst the market was closed (i.e. trade on Wall Street and other international markets) that will affect prices. Think of it as if you were selling your house and you listed your property for sale on a Monday, with the reserve at $1m for an Auction on Friday. If on Wednesday the RBA cut rates, your local council announced plans to build three new schools, and the newspaper announced your suburb as the country’s most liveable, then chances are your reserve would be changed to $1.1 come auction time on Friday. Furthermore, everyone wanting to buy your house would understand (hopefully) that they would have to increase their price expectations (bids) as well.
OK, so that’s the opening market auction. The purpose of the closing market auction is slightly different and, I think, a little more functional. Suppose you are a broker that was handed a 100k share parcel to get rid of today. The client has given strict instructions for you not to be holding a single share by the end of trade. You employ an algo to leak the parcel into the market so as to not smash the price (see my previous article, here, for more explanation) and, at 4 pm, you still have a 3k residual. Here is where the auction comes in handy for you. You offer that parcel into the auction at a very low price…basically you will take whatever you can get so as to not upset the client. By offering the stock low, you increase the likelihood of the stock being soaked up in the auction, i.e. a lower price gets you at the front of the queue of buyers in the action.
These are fairly crude examples and, in reality, a broker would be more likely to make a phone call to his list of contacts and offer that 3k parcel around to people at a discounted price to see if there are any takers but, worst-case scenario, they would put the stock into the auction as outlined above.
Who can participate?
The auctions are open and available to anyone. I have personally participated in both in the past. The opening market auction is easy, you just set your order in your trading platform. The closing market auction is a little different, or at least it was when I last did it. To participate I always had to call the broker and ask specifically for them to put my order into the auction. Not sure if that has changed now - it was a long time ago.
The sum total of all this is that the opening market auction sets the official opening price for the new trading session, which can be different from the previous close. And the closing market auction explains why the price moves between 4 pm and 4:10 pm.
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Bear77 notes: No, you do not need to ring a broker anymore to participate in the ASX's daily closing auction. You can add, modify or cancel trades live using your online broker (Commsec, NABTrade, Selfwealth, Think Markets, etc.) between 4pm (when the ASX officially closes) and 4:10 (when the auction actually takes place) and it's certainly not just for dumping residual shares from a client's parcel of shares that you've been asked to sell. I have used it to close out my own trades when I'm worried about what might happen overnight that might negatively impact sentiment and drive the stock's price down the following morning.
I have also used the closing auction to pick up shares at bargain prices or to sell shares at higher prices than you would usually expect.
You can place a lowball buy bid in the closing auction, or position the bid before 4pm if you prefer (it will stay there until the 4:10pm auction, and will remain there if not executed during the auction), and if people are desperate to sell, you might just get that order filled. Conversely, if you are holding a position, you can sometimes lodge a high priced sell order and get that order filled when conditions are right. An example of when this can work well is when a company is being heavily shorted, and some positive news is released that drives the share price higher, and it becomes increasingly obvious towards the end of the trading day (usually 4pm) that there are shorters out there desperately attempting to cover their shorts (buy the stock back before the stock goes any higher and they lose even more money, as they have only borrowed those shares, then sold them on the basis that they believe they can buy them back at a lower price before they have to return the shares, which can work if they are correct and the share price goes lower, but works against them when positive news drives the share price higher). Short covering can really accelerate a north-bound share price spike, as the shorters panic over where the stock's price might go over subsequent days. In short (no pun intended, much), they just want to get out, once their trade goes pear-shaped. And people with longer investment horizons (even just longer than one or two days in this case) can be the beneficiaries of that panic. You could feel sorry for the shorters, but I tend not to, as I'm not a fan of shorting myself, so I'm happy to be on the other side of the trade sometimes.
You can make similar trades during the ASX's 10am to 4pm normal trading hours, but the difference is that the closing auction is the LAST chance on THAT day for people who want to close out a position to do so (or to get set in a stock that they think is likely to go higher the following trading day), so you often do see prices end up at extremes (both high and low) as a result. Remember that ALL shares traded for each individual company in the opening and closing auctions are ALL ALWAYS traded at the SAME price (for that company). There is no range. It's all done using the ASX's price-matching algorithm. And that's why the moves can be so great.
As a quick example, if you're a shorter, and you've borrowed MND stock from UBS and promptly sold that stock on-market with the expectation that you will be able to buy that stock back at a lower price during the next 3 weeks (or whatever timeframe applies) before having to return the stock to UBS, and you see MND's share price turn and start heading north at a good clip because of either positive company-specific news or because of a positive shift in sentiment towards the sector that MND operate in and the drivers behind that sector, and you think that positive run is now likely to continue, you will want to buy that MND stock back as soon as you can. If you think MND is now going higher, you are simply going to lose more money by waiting. The higher they go, the more you are going to have to pay to buy the stock back before returning it to UBS. To close out your position, in this case, you need to buy back the stock you had previously sold, because you need to return the stock to the people you borrowed it from. So you start lodging buy orders but the price keeps moving ahead of you and your orders do not get filled. 4pm comes. No more trading, except for the closing price auction at 4:10. You lodge a high priced buy order. You check the indicative closing price (which is calculated based on where the price would land if the auction was held immediately based on all buy and sell orders already in place) and it is already higher than your buy order, so you increase your buy order price, by a LOT, to get ahead of the pack. Others are looking to sell into this frenzy, but they see the indicative price keep going up, so they keep raising their offers. Rinse and repeat. That's how these spikes occur. It is usually an overreaction, as sharemarkets usually tend to overreact in both directions. However, if you are on the relaxed end of that trade - i.e. looking to sell out or trim your position into a mad spike up in the share price, or looking to buy shares when everybody seems keen to dump the stock, then closing auctions can be your best friend - for 10 minutes at least.
To check on the indicative price, just request a stock quote as you would during normal trading, and the site you are using should mention that it's an indicative price as long as it's during one of the two auction periods (opening or closing auctions). Once the opening auction completes, the price will be the live price. Once the closing auction completes, the price will be the closing price. If you had a sell order in during the auction and the closing price ends up above that sell price, then your order will be filled at the higher closing price. If you had a buy order in during the auction and the closing price ends up below your buy price, then your order will also be filled, at the lower closing price. For the opening auction, substitute the word "opening" where I've used "closing". If your buy or sell order is equal to the opening price in the opening auction or the closing price in the closing auction then your order will get filled as long as there was sufficent volume on the other side of the trade. Meaning if you lodge a sell order for 1,000 MND at $14.14, and the stock closes (at the end of the closing auction) at $14.14, then your sell order will go through at $14.14 as long as there were enough buyers to soak up all 1,000 shares. It is actually possible for only part of your order to go through, or none of it, if there is insufficient volume on the other side of the trade. To make that example even simpler, if the closing auction ends up with 5,400,000 shares to be bought and 5,400,500 shares to be sold at $14.14, then there is excess volume of 500 shares on the "sell" side, and if you are unlucky enough to be placed LAST in the queue on the sell side, then only 500 of your 1,000 shares would get sold, and the other 500 would stay in the system as a live order for the next day (as long as your trade was not placed as a single day trade, i.e. expiring at the end of the day). If the excess volume was 2,000 shares on the sell side and you were last in the queue, then none of your shares would sell that day.
If your trade was lodged as a 30-day or open trade (or any period greater than one day) then any shares not traded that day would remain as a trade for the following day. This is important to remember, because you might want to cancel or modify that trade before the next opening auction - on the next trading day. Many of us have received notifications about trades that have just gone through after we'd forgotten that they were still in the system. All good if the reasons why you placed the trade still stand, but perhaps not so smashing if things have changed significantly since then.
Anyway - end of Bear77 notes ---
The section above, between my intro and my notes was penned by Chris Conway, Senior Market Analyst at "MarcusToday", a newsletter and website I've been a paid subscriber to for a number of years. You can check it out here: HOME - Marcus Today His article can be found here.
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I can recommend it on the basis that they certainly do inform, explain, educate and entertain. Whether you make money from being a subscriber would depend a fair bit on how you use the information provided. I am not interested in their managed funds, or in their daily and weekly moves within their model portfolios, but I use their daily newsletters to help me keep up with what is happening daily on our market (and overnight in the US), and I do use their website as well. I find that from an ideas generation perspective, I am more likely to get good ideas on companies to do more research on from sites like Strawman.com than from MarcusToday.com.au, but I still find that the MT newsletter is a valuable tool to save me a heap of time in terms of keeping myself across what is happening daily and weekly in our market. It's not the type of service that everybody needs, but I personally find it to be excellent value for me. I don't receive any financial or other incentive from promoting MT, but I reckon if I'm going to occasionally reprint something they've written (as I have above), then I should give them credit for it as well as give them a quick plug so that people who are interested can learn more.