The What, Why, and When of Market-On-Close Orders
A Market-On-Close (MOC) order is an intriguing order type for many traders. It's an important tool in an investor's arsenal, allowing for the execution of trades at the very end of the trading day. This article elucidates the specifics of MOC orders, providing an understanding of how and when they're used, and their impact on trading strategies.
Definition of a Market-On-Close Order
A Market-On-Close (MOC) order is a type of trading order to buy or sell a security at the close of the market day. These orders are executed as closely as possible to the closing price of a security. They are non-limit market orders, meaning they are executed at the best available price at the time of closing. MOC orders can be either to buy or sell, depending on the trader's strategy and market anticipation.
Why Use a Market-On-Close Order?
Traders and investors might opt for MOC orders for various reasons. If a stock has strong momentum throughout the trading day, but the investor doesn't wish to hold it past the day's end, an MOC order can be a strategic move. This might be due to anticipated industry reports or any number of market factors that could impact the stock's performance the following day. In such cases, a trader might request their broker to execute an MOC order to sell the shares. Also, MOC orders are commonly used by indexed mutual funds whose primary goal is to track an index, which typically uses closing prices for its calculations.
The Timing of Market-On-Close Orders
The timing of an MOC order is significant. On the New York Stock Exchange (NYSE), for example, all MOC orders must be received by 3:50 p.m. Eastern Time (ET), unless they are entered to offset a published imbalance. Furthermore, NYSE rules prohibit the cancellation or reduction of any MOC order after 3:45 p.m. ET.
On the Nasdaq, MOC orders must be received by Island (an electronic communication network for trading securities) by 3:55 p.m. ET, with a cutoff for cancellation or modification at 3:50 p.m. ET.
Balancing Orders and Maintaining an Orderly Market
At 2 p.m., the NYSE publishes the order imbalances for the day. This information is only visible to traders and brokers with access to more profound market insights. As a response, some traders might place large MOC orders to balance the outstanding orders, either as limit-on-close or market-on-close orders.
At 3:45, the MOC orders become visible to all traders. This transparency can encourage traders to place orders to balance out the trading activity, maintaining an orderly market. At the market's opening and closing, the exchange sets a price at which all the opening or closing orders for a stock will be filled, except for limit orders. A Market-On-Close order is a powerful tool for traders who wish to maximize the benefits of day-end price movements. Whether to sell or buy, these orders provide traders with the opportunity to tap into end-of-day trading trends. Understanding and effectively utilizing MOC orders can augment a trader's strategy, potentially leading to more significant gains.
Summary
A market-on-close order is used to execute a trade at the last possible moment before the market closes for the day. This may be an order to sell or buy.
Market-on-close orders are instructions to execute a trade just before the market closes for the day, at the best price available at the time. The exchange will actually settle all of the market-on-close orders at the same price. Why would an investor enter this kind of trade order?
If a stock has solid momentum one day, but the investor absolutely doesn’t want to continue to hold it after that day, for whatever reason — which could be a pending industry report that they expect to be bad, or any number of other things — the investor could ask his or her broker to take the market-on-close price to sell the shares. Closing orders can be at-market (whatever the price is at the time) or limit orders.
Toward the end of the day, at 2 pm, the NYSE will publish the order imbalances for the day, but this will only be visible to traders and brokers with a deeper level of market information than the public can see. This may give some traders information that they will use to place large closing orders to fill the need for the outstanding orders, and they might execute these as a limit-on-close or market-on-close order.
At 3:45, the market-on-close orders become visible to everyone. This may encourage traders to sweep in and balance out the orders. At close, and at open, the exchange will name a price at which all of the at-close or at-open orders for a stock will be filled, except for limit orders. This is in an effort to maintain an orderly market.
Indexed mutual funds might intentionally trade using Market-on-close orders, since their only purpose is to track the index, which typically uses closing prices. Mutual fund managers’ trading does account for most of the trading on the exchanges, according to some reports.
What is a Market-on-Open order?
What is a Market-With-Protection order?