In 2004, NASDAQ introduced the Opening Cross and Closing Cross -- price discovery facilities that cross orders at a single price at the beginning and end of the regular market session. The NASDAQ Crosses enable market participants to execute on-open and on-close interest and provide unparalleled transparency. Since the launch, market makers and other industry professionals have repeatedly demonstrated their willingness and ability to offset imbalances that are entered into the cross.

Beginning in late July 2005, eSignal began giving its TotalView subscribers access to the enhanced supply and demand data related to the NASDAQ crosses. This data -- known as the Net Order Imbalance Indicator -- provides a preview of forces that will affect the stocks' opening and closing prices.

This data reveals trading opportunities not visible anywhere else in the market and allows traders to further enhance their trading performance. This data is increasingly being viewed as critical for anyone trying to open or close positions near the beginning or end of the trading day. As with all of the TotalView data, trading without it is like trading with one eye closed.

For more information on trading with NASDAQ TotalView’s market depth and speed advantages over legacy NASDAQ Level II data, see the May 2005 article in the Exchange.

To better understand the ways in which the Net Order Imbalance Indicator can be used, you must first understand how the NASDAQ Crosses work. To summarize:

The NASDAQ Opening and Closing Crosses provide accurate and consistent opening and closing prices for NASDAQ-listed issues. Additional features of the crosses include:

• Enhanced transparency and execution choices prior to and at the open, as well as prior to and at the close
  
  
• A true price discovery facility that represents supply and demand in the marketplace
  
  
• A facility to resolve natural order imbalances in critical events, such as expiration dates for index futures and options
  

How the Cross Works

The NASDAQ Cross enables market participants to execute on-open and on-close interest in a robust price discovery facility.

• NASDAQ accepts on-open order types that are executable only during the opening cross and on-close order types that are executable only during the closing cross.

• Leading up to the crosses, NASDAQ disseminates information about any order imbalance that exists among orders on the opening and closing books, along with indicative opening and closing prices.

• In the crossing process, the opening book and the NASDAQ continuous book are brought together to create a single NASDAQ Opening Cross, which occurs at 9:30 a.m. ET. Likewise, for the closing cross, the NASDAQ Closing Cross occurs at 4:00 p.m. ET.

• NASDAQ opening and closing prices are distributed to the industry immediately after each cross occurs.
  

Order Types

• On-Open (OO) and On-Close (OC) Orders: Market-on-Open (MOO) and Limit-on-Open (LOO) orders allow investors to specifically request an execution at the opening price. Similarly, Market-on-Close (MOC) and Limit-on-Close (LOC) orders allow investors to specifically request an execution at the closing price. For the purposes of the opening cross, regular-hours orders entered prior to 9:28 a.m. are treated as on-open orders.

• Imbalance-Only (IO) Orders: These are priced orders that provide liquidity to offset OO and OC orders during the crosses and only execute at or above / below the 9:30 a.m. ET and 4:00 p.m. ET NASDAQ offer / bid. More aggressively priced IO orders are re-priced to the NASDAQ inside prior to execution of the cross.
  

Dissemination of Imbalance Information

Imbalance information about the closing and opening crosses is disseminated to market participants prior to the cross itself. This data, called the Net Order Imbalance Indicator (NOII), is disseminated via the NASDAQ TotalView service available on eSignal version 7.9.1. It allows subscribers to stay on par with other professional and institutional subscribers of NASDAQ TotalView, including NASDAQ workstation and service bureau users.

The opening imbalance information is distributed between 9:25:30 and 9:30:00 a.m. ET, while the closing imbalance information is distributed between 3:50:00 and 4:00:00 p.m. ET.

The NOII includes the following data elements:

• Near Clearing Price: This is the crossing price at which orders in the NASDAQ opening book and continuous book would clear against each other at the time of the dissemination.

• Far Clearing Price: This is the crossing price at which orders in the NASDAQ opening book would clear against each other at the time of the dissemination.

• Current Reference Price: This is the reference price at or within the NASDAQ inside on which the paired shares and imbalance are based.

• Number of Paired Shares: This is the number of opening shares that NASDAQ is able to pair off at the current reference price.

• Imbalance Quantity: This is the number of opening shares that would remain unexecuted at the current inside match price and the side of the imbalance (buy, sell or none if there is no imbalance).

This information is disseminated with increasing frequency as follows:

• Every 30 seconds between 3:50:00 and 3:55:00 a.m. ET
  
  
• Every 15 seconds between 9:25:30 and 9:28:19 a.m. ET and 3:55:00 and 3:59:00 p.m. ET
  
  
• Every 5 seconds between 9:28:20 and 9:29:59 a.m. ET and 3:59:00 and 3:59:55 p.m. ET

In addition to the real-time delivery of NOII data via TotalView, NASDAQ also provides historical NOII data. Daily statistics, as well as archived imbalance messages, are available on NASDAQ’s Experimental Market Information (EMI) website at: http://emi.nasdaq.com. This information can assist you in understanding the forces at work in the opening and closing processes, as well as help you to hone your skills in interpreting the data.

Trading Examples

Described simply, seeing the NOII data reveals the supply and demand for a stock -- based on actual buy and sell orders in the market -- 10 minutes prior to the close and 5 minutes prior to the open. Naturally, given this data, you can make more informed decisions about how and when you’d buy into or sell out of a particular position.

Additionally, by seeing this data, you better understand price movements and the risk profile of the stocks you currently hold or are considering holding. In the case of large but temporary imbalances that you believe to be unreflective of the market, there are short-run profit opportunities to buy (or sell) on the imbalance and sell (or buy) on the bounce. Finally, for those with specific trading strategies around trading at the open and the close, using the NOII to better time orders can directly affect profitability. It is this last case that forms the basis for this example.

In this example from a couple months ago, the trader was long 1000 in CPWR (Compuware Corp) and was committed to exiting the position by the end of the day. His TotalView data showed the following as of 3:50:00 p.m. ET:

[Note that these displays are not reflective of the eSignal display. Examples of eSignal’s displays will follow below.]

Data in red is unique to TotalView, of course. Note that he could sell his 1,000 shares immediately for $6.39. However, see that the order imbalance shows that there is a buy-imbalance for 17,000 shares (“B17000”) and a near and a far price of $6.42 and $6.43, respectively (“n:6.42” f:6.43”). There are also 67,700 shares paired at the reference price of 6.40.

When he sees this indication of upward price pressure -- both in the buy-imbalance and the near and far prices -- he infers that he’ll do at least as well, if not better, by holding this position until nearer to the close.

Compare the previous screen to that of a simple Level II screen:

Obviously, when looking at Level II, not only does he miss the 17,000-share buy imbalance but also the significant pocket of buy-liquidity (8,500 shares) at $6.38 in the continuous market.

So that you are clear on what was causing the buy imbalance, I'm providing the following sampling of the “state” of the books that was driving the TotalView data at the time.

When he or she sees NOII data in red, a trader using TotalView can get a summary view into the orders in gray -- those orders that will come into play at the close. (The table does not show what causes the paired shares.)

As the market neared the cross itself, the market maker positions adjusted upward to respond to the gap in supply and demand (in large part, in response to the imbalance data being published). By 3:59:30 p.m., the market was 6.42 x 6.43. This trader was able to sell out of his position at $6.42 instead.

Naturally, there will be larger and smaller opportunities, depending on the stock and the day. Obviously, however, the NOII data in TotalView is a critical performance-enhancing tool for anyone opening or closing positions near the end or the beginning of the day.

For reference purposes, here is a sampling of how eSignal displays the NOII in version 7.9.1:

As noted earlier, there are many such cases where you can leverage the NOII data to enhance their trading performance. By seeing all of the relevant supply and demand information, you can make better, more informed decisions as to how and when to enter and exit positions. Trading without this information -- especially in the context where others have it -- is trading with incomplete information and exposing yourself to undue risk.

For further information on trading with the NOII data, please join me for a web chat later this month. Stay tuned for more details on date and time.

Randall Hopkins is Director of NASDAQ Market Data. In this role, Randall works with market data vendors and data subscribers to integrate NASDAQ data with their applications and use it to their benefit. He is currently spending much of his time presenting information to active trader audiences on how the TotalView data differs from the legacy Level II data and how it can benefit them in their trading.