Explain to me how this works

Discussion in 'Trading' started by Cyber0066, Nov 8, 2006.

  1. A company closes today at $50. Let's say a company releases earnings statement in the evening and blow analysts estimates. Next day, the stock opens at $60.

    What happened to the $10 difference? Did traders bid up the price during pre-market trading to slowly push the market open to $60? Or did current shareholders just set a price to sell the stock at $60 right off the bat. I don't really get it.
  2. Math_Wiz


    If it's a listed stock (NYSE/AMEX), the specialist will determine the opening price. He will arrive at his figure by looking at the open book between 8am-930am, before the market opens, and also by getting a feel for the institutional buyers and sellers who are represented on the floor by the floor brokers. I believe he then opens the stock where the most open orders would get filled.

    If it's a Nasdaq stock, investors, traders and marketmakers will post their bids and asks via ECN's just as soon as the ECN's turn on for the day. I don't think they are 24-hours yet, someone please correct me if I am wrong. I think they turn on around 7:30 or 8:00am. At first, you are most likely going to see a wide spread at this time. Maybe like $55.00 x $70.00 A few brave souls will begin first thing in the morning by bidding $55.00, feeling relatively confident this is a safe bid. The first few sellers of the morning are also equally confident sitting up at $70.

    Then as the seconds and minutes tick by, the spread gets narrowed by more bidders and sellers until trades finally start taking place.

    Chances are, if a company announces blowout earnings in the evening, the stock is already trading on the ECN's up until 7pm or 8pm, or something like that. I'm not sure of the exact times when the ECN's are open.

    So that's my understanding of it anyways. Someone please correct me if I am wrong, or if I missed anything.

    Enjoy, and good trading to you.

    +-*/ Math_Wiz
  3. (1) It's based on the interaction of new and existing orders. (2) The $60 opening price should be the price that "maximizes and balances" volume AND properly accomodates all of the market, stop and limit orders at that level. (3) In a perfect market, the $60 opening would have the same quantity of shares being bid for and offered at the market. (4) Going any lower would create a buying imbalance. (5) Going any higher would create a selling imbalance
  4. The aftermarket on the ECNs is hugely active. Millions of shares will trade in seconds. The "gap" you see on a daily chart was generally filled with active trading before or after hours.