how do the specialists handle opening price and price improvement?

Discussion in 'Order Execution' started by joema, Dec 11, 2005.

  1. joema


    i searched but didn't get the answer i wanted, how the specialist handle the opening orders and decided the opening price. and why there are price improvement some times?

    last week i send my order to buy 1000 shares PFE at 21.05 before the market open. i saw the openbook someone wanna buy some @30 or @100 and someone wanna sold @18 or 19, and finally i got filled @21.04

    why i got the price improvement and how the specialist set 21.04 was just the opening price?

    a lot of thanks
  2. Dustin


  3. alanm


    Generally, the opening price is that which will match the largest number of shares between buy order and sell orders. A good OpenBook tool would walk through each price to see how many shares cross, and give you some idea of the range of possible openings. Of course, depending on the stock, the orders in the book can be greatly overshadowed by floor activity. This is particularly true when the stock is gapping on news.
  4. trade24


    opening price is based upon total to buy/sell at certain levels..this includes orders that floor brokers are holding in their open book doesnt show that..the spec will ask people in the crowd where they would be willing to buy and sell stock..the spec would give them an indication where they would like to open it and the floor broker can then choose to go along (i worked on the floor of the nyse for 7 yrs)...hopefully this helps
  5. You can't find the answer you wanted because specialists fail so many times that they will be the laughing stock if they post their 'naive' attempts.

  6. It's actually a very efficient process, and few have actually performed or participated in the function. Buy and Sell orders come in all night from the usual sources (brokerages, hedge funds, public, etc.) and are marked "opening only" indicating that they want the opening price, or to be "out" (not executed). These orders include both "limit" and "market" designations.

    The Specialist's job is to match these orders up in such a fashion as to give the best possible pricing to both sides. First the match the market orders by base share size (100,000 buy and 100,000 sell)...these won't affect the opening price. Then they see how many shares are being bid for up to a certainl level (say $31.00). They then see how many sell orders have limits at $31.00 or lower, and match these up (say 40,000 each fit into this category, indicating a possible$31.00 opening price). Now, if they have an additional 50,000 shares to buy up to a limit of 31.25, they follow the "ladder" of open sell orders until they have a good portion of the shares required. At that point, they "accomodate" the balance of orders themselves, thus creating a "fair and orderly" market with their participation. The stock opens at 31.25, all orders are filled at the same price, and the Specialist has performed his/her function to the best of their ability.

    Of course, not all Specialists perform this task with equal virtuosity, but most perform this tedious task with fairness and skill. They are watched so closely that it would be foolish to risk their high paying job to take part in any sort of shenanigans.

    And, the NYOB is not really a good indicator until the market opens.

    Hope this helps!

  7. joema


    to Dustin

    first, i would like to thank Dustin introducing that opening strategy thread to me, and i spent weeks to review all the don's opeing threads knowing you guys had been playing such a game.

    to Don

    thank you very much for your reply and i still got a question here:

    according to your opening strategy,you set envelopes base on the FV and beta, wish you will get the good opening price right?

    so why don't you guys do it like this, say PFE prev close is 25.56

    i don't care what FV and beta was ,just put bid @25.55 and short sale @25.57, no matter what the opening price and direction are ,i get price improvement right?

    gap down and opened @25.30, so i got filled @ 25.30
    gap up and opened @25.65 so i got fill @25.65

    and i think it'll be easy to get out, if i get flat at once,hoping to take 5--10 cents, in about 10min.

    can you guys tell me wheather i can make money by employing this simple and silly strategy?

    (sure i know money don't come that easy, but just want to know why it won't work)
  8. Dustin


    That won't work because if the market is gapping down, then PFE "should" gap down also and then you have no edge. The idea is to catch a stock away from it's opening fair value, not just a stock that gaps.
  9. Don,

    Thats nice of you to explain it. You are a much more patient person that I. I am always surprised that people would rather speculate on what goes on instead of learning the truth.

    For those who have some interest in knowing the details just head on over to the exchange. You can buy the Handbook, or the Exchange Guide. They are available on paperback or CD. Here is the URL.

    Merry Christmas



    See I am trying to play nice. I could have said "look you cheap bastards, how about spending some money on your education for a change instead of posting about things you dont know shit about?" But nooo, I didnt...I want some credit for that the next time I say something that pisses you guys off.:D


    If you trade listed stocks, just buy the CD ("you cheap bastards")
  10. Dustin has a good point, and I might add that if the stock were to open real close to the previous day's closing price, you probably won't want to "play" - since the Specialist may not be "playing" - the ordes were matched up closely...more of a "coin toss."

    The "Prime Directive" of the whole strategy is to be "on the same side as the Specialist" - right...??

    I think I will buy the CD as well...I don't want to be a "cheap bastard"....LOL

    Back to work..

    #10     Dec 27, 2005