Why the ASX 200 moves after the market closes
I’ve had a few questions from members recently about the opening and closing market auctions, particularly why the ASX 200 moves after the market closes at 4 pm. Hopefully, the article below explains it clearly.
The ASX trading day runs from 10 am until 4 pm. That is when the market is open and active. But there are a few caveats to those times.
Firstly, the ASX operates under a staggered open, which is controlled alphabetically… the A’s open first and the Z’s open last. The staggered opening times are as follows;
- Stock codes starting with A-B open at 10:00:00am (+/- 15 seconds);
- Stock codes starting with C-F open at 10:02:15 am (+/- 15 seconds);
- Stock codes starting with G-M at 10:04:30 am (+/- 15 seconds);
- Stock codes starting with N-R at 10:06:45 am (+/- 15 seconds);
- Stock codes starting with S-Z at 10:09:00 am (+/- 15 seconds);
Secondly, there is ‘pre-open’ period from 7 am to 10 am each morning, where bids and offers (orders) can be submitted but no trading occurs. This allows market participants (instos, funds, brokers, individuals) to enter buy and sell orders at the prices they want to transact at.
Opening Market Auction
For example, I might see that iron ore was up strongly overnight and form a bullish opinion on BHP (ASX: BHP). If BHP closed at $30 yesterday, then I might place a limit order up to $31. In this instance, I am telling the market that I will pay up to $31 for my desired number of BHP shares – but no more – and by submitting that order, I am placed in the queue at the relevant price.
If there is a seller on the other side, willing to take $31 or less, then I will get filled. If there are a mountain of people willing to pay more than $31 however, and they have submitted bids as such, then I will miss out.
The ASX employs a matching algorithm to determine the price point at which demand will net out supply in the opening market auction. This is the price that the stock will open at and is the official opening price on the day. Sometimes (oftentimes) the price on the open will be different than the price from the prior session’s close, and that because of the bids and offers which have been submitted in between and the opening match described above.
Closing Market Auction
At 4 pm, regular trading on the ASX ceases and a closing market auction, similar to the opening market auction, occurs. Why have an auction? Well, for the opening market auction it is all about determining an opening price given that events have occurred whilst the market was closed (i.e. trade on Wall Street and other international markets) that will affect prices.
Think of it as if you were selling your house and you listed your property for sale on a Monday, with the reserve at $1m for an Auction on Friday. If on Wednesday the RBA cut rates, your local council announced plans to build three new schools, and the newspaper announced your suburb as the country’s most liveable, then chances are your reserve would be changed to $1.1 come auction time on Friday. Furthermore, everyone wanting to buy your house would understand (hopefully) that they would have to increase their price expectations (bids) as well.
OK, so that’s the opening market auction. The purpose of the closing market auction is slightly different and, I think, a little more functional. Suppose you are a broker that was handed a 100k share parcel to get rid of today. The client has given strict instructions for you not to be holding a single share by the end of trade. You employ an algo to leak the parcel into the market so as to not smash the price and, at 4 pm, you still have a 3k residual.
Here is where the auction comes in handy for you. You offer that parcel into the auction at a very low price…basically you will take whatever you can get so as to not upset the client. By offering the stock low, you increase the likelihood of the stock being soaked up in the auction, i.e. a lower price gets you at the front of the queue of buyers in the action.
These are fairly crude examples and, in reality, a broker would be more likely to make a phone call to his list of contacts and offer that 3k parcel around to people at a discounted price to see if there are any takers but, worst-case scenario, they would put the stock into the auction as outlined above.
Who can participate?
The auctions are open and available to anyone. I have personally participated in both in the past. The opening market auction is easy, you just set your order in your trading platform. The closing market auction is a little different, or at least it was when I last did it. To participate I always had to call the broker and ask specifically for them to put my order into the auction. Not sure if that has changed now – it was a long time ago.
The sum total of all this is that the opening market auction sets the official opening price for the new trading session, which can be different from the previous close. And the closing market auction explains why the price moves between 4 pm and 4:10 pm.
Chris runs the Trading Ideas section for Marcus Today members, using a mechanical approach he educates our members on building their own trading plans as well as providing new trading ideas. CLICK HERE to read the lessons he learnt from his first 50 trades.