Thursday, December 14, 2006

Institutional Behavior At The Close: Does It Affect The Next Open?

When institutions enter large numbers of buy or sell orders on an MOC (market on close) basis, does this affect the next open?

I went back to 2004 (N = 744 trading days) and divided the sample in half based upon the net buying vs. selling in institutional MOC orders. When there was relatively strong buying at the close (N = 372), the next open in the S&P 500 Index (SPY) was up by an average of .01% (168 up, 204 down). Conversely, when there was relatively weak buying at the close, the next morning's open in SPY was up by an average of .06% (225 up, 147 down). Interestingly, when there was outright net selling at the close (N = 87), the next morning's open was up by an average of .11% (55 up, 32 down).

If you've ever had the feeling that you bail out of positions at the wrong time, at least you now know that you're in good company. Even at the market close, at a very short time frame, we see evidence of reversal effects.

So here's the puzzle: How do we know what institutions are doing at the market close? I'll verify the answer if anyone figures it out and posts it as a blog comment. It's actually pretty simple.

16 comments:

yinTrader said...

Hi Brett

If you say it is simple, then the answer must be in your post:

Quote
When there was relatively strong buying at the close (N = 372), the next open in the S&P 500 Index (SPY) was up by an average of .01% (168 up, 204 down). Conversely, when there was relatively weak buying at the close, the next morning's open in SPY was up by an average of .06% (225 up, 147 down). Interestingly, when there was outright net selling at the close (N = 87), the next morning's open was up by an average of .11% (55 up, 32 down). Unquote

If the following instruments behave as you put it, then we know what the institutions have been doing at the close of market.

Naive answer?

It was scary the way ESH7 kept going north and I just watched frozen doing nothing , having bailed out way too soon.

Brett Steenbarger, Ph.D. said...

Hi Yin,

No, the answer isn't in the post...but it's relatively simple.

It was quite a rally in the morning. Your example shows how important it is to establish targets for exits. That's something I might be addressing in a future post. Thanks--

Brett

Anonymous said...

I've always been under the impression that high volume was the hallmark of institutional activity. The open and close today sure looked like institutional buying. However, the total volume for the day wasn't exactly spectacular. (below average on the SPY) So my answer is "I don't know". I'd love to hear your answer.

kalius said...

Brett:

In your testing you usually have an N of 700's. Thou it varies a bit depending on the post.

Can you explain how you select the N for your backtesting? Some reasoning behind the N number?

Why around 700's days?

Brett Steenbarger, Ph.D. said...

Hi Marc,

If you look at volume in 5 min intervals compared to what normal volume is at those 5 min intervals, you'll see the points where institutional traders ran over the locals--esp in the AM.

I suppose you could look at volume in the closing minutes of trade as a function of avg volume in the closing minutes; that would be interesting. But it's not what I had in mind. Thanks for the note--

Brett

Brett Steenbarger, Ph.D. said...

Hi Kalius,

Most of my posts look at the most recent "regime" from 2004-present. I try to choose a market period that is relatively homogeneous in trending and volatility patterns, and often that ends up being a 2 year (or so) lookback period.

Brett

Paulo de León said...

I agree with Yin, scarry move in the 1st HHr. This changes in tempo are one the tactics of deception described by V. Niederhoffer, or maybe a disrupting behavior.
I never thought about the MOC event. But i probably check the volume from NYSE close to CME close or the first fime minutes after NYSE close. If the volume is bigger than average, Institutionals exsecuted their signals. Buy or sell depends on the direction of the move in those after hrs minutes.

Brett Steenbarger, Ph.D. said...

Hi Paulo,

I agree the volume analysis near the market close would be interesting and something I might try. My post was based on different information, however. A move is likely to be "scary" when it is unanticipated. I think the strength of the early rise--its persistence--took a lot of people by surprise. Thanks for the note--

Brett

Anonymous said...

Hi Dr.Brett, a trader could analyse the volume and price action in the last five or ten minutes of the trading day.

1. Do a tick filter to separtate large volume trades from small ones.

2.Then subtract the volume bid from the ask. If the volume at the ask greatly out numbers the bid this could tell us what the institutions are doing.

3.Then we should look to see how this volume affects the price movement (price efficiency). If big volume is coming through at the ask and price is moving up, this gives us some insight about the institutional buying. However if big volume at the offer is not moving the price this could be a warning of larger selling at hand.

BTW: Thank You so much for your help over the past few years. I have read and studied so much material through the years and I can honestly say your insight, intelligence, and integrity has made me a profitable trader.

Cheers
aiva_trader

Brett Steenbarger, Ph.D. said...

Hello Aiva Trader,

I very much appreciate your kind comments. And I'm very happy for your success.

Your ideas re: looking at large trades and picking out volume at bid vs ask at the end of the day are excellent. That's a study worth doing.

My method in the post, however, is even simpler than that...

But you're close, Aiva Trader...very close.

Brett

Anonymous said...

Dr. Brett, is it watching the activity of the Tick in the final minutes of the day? Large spikes in the tick could reveal institutional buying.

Aiva_trader

Science_of_Speculation said...

You simply took the price at X minutes before close and compared with closing price and recorded the change as the direction of MOC trading. You assumed every single day of the population had institutional MOC action.

Dom said...

When the exchange announces that there is a buy imbalance...istitutions are sellers; and when there is a sell imbalance...institutions are buyers. These contra orders are allowed in the last 20 minutes on the NYSE and within the last 10 minutes on NASDAQ orders.

Brett Steenbarger, Ph.D. said...

And the winner is...

Aiva Trader!

Yes, all I did was look at the final NYSE TICK reading for the day.

Think about it: the TICK jumps up or down in the last seconds of the day based on MOC orders--and only institutional orders are large enough to move the TICK.

When TICK is very high at the last reading of the day, the open tends to be weaker than if there's selling (negative TICK) at the end of the day.

Great get!

Brett

Now I'll go back to my musical interlude down memory lane: the music I listened to over 30 years ago...sigh...

http://www.youtube.com/watch?v=c8Zh-6cPH7I&mode=related&search=

Brett Steenbarger, Ph.D. said...

Hi Science of Spec,

Not a bad idea! Thanks--

Brett

Brett Steenbarger, Ph.D. said...

Hi Montauk Mack,

That is a super idea; it never came to my mind. Don't know if there's historical data on that, but if so it would be great to study--Thanks--

Brett