Market on Open (MOO) is a specific order type that instructs your broker/their dealing platform to execute your order immediately the market opens.
The order is often given without a limit, which means the client wants to be filled regardless of the opening and subsequent prices.
In modern equity markets this often means executing the order in the opening auction or uncrossing.
It’s a dangerous strategy but there are times when it's appropriate to use this order type - usually when you want into or out of a position in a gapping market.
The trader can judge whether giving an MOO order was prudent, or not, by reviewing the price action that unfolds across the balance of the trading day.
In recent trading sessions I have noticed a few poorly handled executions.
I say that because I can’t think what else they can be.
The price action in each of the examples below doesn't look like a margin call liquidation of only because there wasn’t really a big swing in the price in the prior session, and the trading pattern looks like single orders.
Our first example comes in a Danish Stock Zealand Pharma ZEAL DC
Denmark has a reputation of not being the most liquid market, so price swings in Danish equities are not that uncommon. However, even taking that on board, the sale of just over 10,000 shares in Zealand Pharma, highlighted below, looks heavy handed at best.
Indeed, it gapped lower on the open, and the price of Zealand Pharma was driven down through the stock's 52-week low, to a new 1-year low of DKK 347.90.
It didn’t stay there however, and within an hour it was trading back at DKK 358.00.
And it would go on to close at DKK 374.15, more than DKK +26.00 above the low, and indeed the last price was also the highest price of the day.
Source: Barchart.com
It's not an isolated incident either; here is a recent example in Hedge Fund manager Man Group EMG LN.
Where a sale on the open, of just over 101,000 shares sent the stock's price plunging downward by -3.0%.
Again this makes no sense to me because EMG LN trades something like 3.0 million shares per day on average.
So liquidity certainly shouldn’t be an issue.
And what I mean here is that this sale could have been finessed across the first hour,or, couple of hours of trading, or indeed, the whole morning with minimal market impact.
Market impact is the visible change to the existing price of an instrument, that the introduction and execution of a new order makes.
Most institutional traders hope to execute their business with limited or minimal market impact.
They want to buy or sell the instrument they are trading without the wider market noticing.
They want to be anonymous and invisible, lost in the crowd, if you will, not standing out like a sore thumb.
Poorly handled, or high impact execution isn’t just confined to the market open however, it's noticeable throughout the trading day if you know what to look for.
Take this chart of Vodafone for example there are three instances when the price spikes away from the normal ebb and flow of buy and sell orders/supply and demand these moves are not insignificant either with the price moving by as much 10p or more. Before falling back into line.
Source: Barchart.com
Now if you are anything like me you are wondering about what’s going on here and at the same time whether it’s possible to take advantage of these kinds of price moves?
I can't explain these moves but I can tell you that it’s possible to take advantage of unusual moves in stock prices if you are set up correctly and use good judgement.
One way to spot abnormal price moves would be to set alerts on each stock you follow.
You could set those alerts outside of the average daily range so if that was 2.0%, then you would set alerts to go off, if the stock printed a price that was >2.0% above or below the last price.
Alternatively you could use Bollinger bands on a chart, as I have in the image below.
Source: Barchart.com
Bollinger Bands typically capture moves that are two standard deviations away from the stocks 20 period moving average. The bands, upper and lower, are plotted by adding or subtracting two standard deviations of the 20 Day moving average, to the moving average.
Note though, that in most charting systems the parameters for the Bollinger Band indicator can be configured to suit an individual trader's preferences.
You can clearly see the price of Man Group spiking down though the lower Bollinger Band shortly after 15.00 on July 8th in the chart above, before the price reverts to its prior levels.
Now a word of caution:
Not every print that deviates away from the current bid ask quote, and 20 period moving average will be an error or poorly handled order.
So before jumping in looking for mean reversion, it's important to understand the context of the move,
the prevailing trading patterns in the stock, the volume traded, and its proportion to daily or hourly average volumes in the name and so on.
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