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Another great weather week here is St Louis which is completely uncommon for July. I hope this new blog finds everyone doing well. Recently I ask through one of the threads for topics that you all would like to hear about. I have some great feedback and encourage you to post something if you have an idea about a blog topic. The title of the thread is "For Your Reading Pleasure" and is found in the Active Trader group. So here is the first one in response to FriscoTrader. I have asked my friend Dan from Trade-Ideas to provide some insight on why stocks gap at the open. Here is what he had to say.

"One of the reasons that people have a hard time understanding why stocks gap up and down is because it is often forgotten that while the market in the US has defined market hours, it is open for pre and post market trading.

For example, in pre-market trading a large institution may have a sell order for some size in a stock that does not trade too much. That order is matched with another institutional buyer but because of the size of the order the institution has to sell the price of the transaction is 1 point below the previous close. The assumption is that if that trade went off during market hours that it might impact the stock even more so it is done in pre market and results in a last trade 1 point below the previous day’s close. When other market participants see a trade like that go off they start to speculate in both directions and the result is a lot of pre-market volatility and volume, all before the average investor is awake. The same can be said for a gap up. There are often reasons to buy large blocks of stocks that seem to be for no reason, one common example is portfolio balancing. This is done by large mutual funds and to make sure that risk is spread out in a matter that befits the market. When a fund like Templeton rebalances its portfolios, the underlying stocks may gap up and down for what seems like no reason."

Thank you for the suggestion and please keep them coming. Have a great end of the week and weekend.

Todd

Posted by The ELITE Trader on Aug 6, 2009 7:34 PM GMT

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UncleBeer

Date Posted: Aug 7, 2009 at 8:57 AM

Wait a minnit. That's the Australian exchange rules in that link; please disregard as it's not entirely applicable to the United States exchanges. What happens here is slightly different in that the algorithms used on ASX aren't necessarily applied. On the NYSE & AMEX, the market makers are supposed to look at the pending orders in their books and set a price intended to clear the most shares. It's a relatively manual process. If there are no orders pending for a particular issue, the market makers will set opening price as an "educated guess" depending on overnight events. On the NASDAQ, of course, things are handled electronically thru a two-stage round robin bidding process. Try this link: http://invest-faq.com/cbc/trade-open-price.html

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UncleBeer

Date Posted: Aug 7, 2009 at 8:48 AM

There is actually a series of calculations which are run in a period called "pre-open" where orders may be entered, but are not filled. These prices are used in the calculations to determine opening price. Closing prices are calculated in the same manner. See the link below. http://www.asx.com.au/resources/education/basics/open_Close.htm#

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rverm44820

Date Posted: Aug 5, 2009 at 1:23 PM

digging a little deeeper you will find that there are buy/sell programs that buy/sell a huge amount of stocks in the last 3 seconds of the day. i dont know if the after market traders can bring enough volume to sway the stocks like there doing. on freestockcharts.com i have the window set to 15 minutes you can see there selling 300k-900k in the last minute.

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