Imbalance Only (IO) Orders

What Are Imbalance Only (IO) Orders?

Imbalance only (IO) orders are limit orders that provide liquidity during the opening and closing rotation on the Nasdaq stock exchange. These can be categorized as "imbalance only open orders" or "imbalance only closing orders".

IO orders are thus placed to offset an order imbalance in the opening or closing cross.

Understanding Imbalance Only (IO) Orders

Imbalance only (IO) orders will execute only on the opening cross or closing cross depending on which order type is placed (opening or closing). IO orders can be to buy or sell. IO buy orders only execute at or above the 9:30 a.m. or 4 p.m. bid price, while IO sell orders only execute at or below the offer or ask price.

Before opening and closing crosses are executed, buy or sell IO orders are re-priced to the best bid and ask price, respectively, on the Nasdaq book. IO orders must necessarily be limit orders; market IO orders are not permitted.

The orders offset on-close and on-open orders. Since IO orders are only executable during the opening cross or closing cross, they are not at risk of being executed prior to the market open or close. In this way, they are different from typical limit orders.

Imbalance Only Orders Timing and Considerations

Imbalance reports are published at certain points in the trading day. These reports provide updates on on-open or on-close buy and sell orders that have already been put in place. A buy imbalance indicates an excess of buy orders linked to a certain price as compared to the relevant sell orders. In this scenario, the stock price may rise until the buy and sell orders balance out.

IO (and other) orders are accepted on the Nasdaq starting from 4 a.m. Imbalance information is first released for the day at 9:28 a.m., shortly before the opening cross at 9:30.

Market participants cannot update or cancel IO orders for the opening cross after 9:28 a.m., or update or cancel IO orders for the closing cross after 3:58 p.m. However, in both cases, new IO orders can still be entered after those deadlines.

For the closing cross, the Nasdaq disseminates imbalance information between 3:55 and 4:00 p.m. Closing orders can be entered anytime during the day.

Note that IO orders can sell short. Short sale IO orders and sell IO orders priced at or below the best bid price are re-priced to the best offer price at 4 p.m. During the closing cross, short sale IO orders are executed on a downtick only if the closing price is better than the best bid; these orders will not participate if the closing price is at or below the best bid.

Example of Using an Imbalance Order on the Closing (or Opening) Auction

Assume a day trader or someone who already owns Apple Inc. is interested in selling on the closing cross.

At 3:55 p.m. the imbalance information will be disseminated for Nasdaq stocks, including AAPL. The imbalance information may affect how the stock trades over the last five minutes of trading, since the price may move to offset the imbalance. For example, if there is a large buy imbalance, traders may purchase the stock expecting the price to move up into the close because of the buy imbalance.

Assume there is a buy imbalance of two million shares. The price will likely move up to attract enough sellers to sell two million shares and offset the imbalance. Although, this isn't always the case. The imbalance could flip, and become a sell imbalance as more orders come in for the cross. Other market forces may also drive the stock in a different direction than expected, or the stock may not move much at all.

The trader decides to enter an imbalance only (IO) sell order for 100 shares with a limit price of $220. The stock is currently trading at $220 with about one minute left (3:59 p.m.) until the market closes.

The IO order is a limit order, so it won't fill unless the stock price is above the limit at the time of execution. If the price is below $220, the sell order won't execute. If the closing cross price is above $220, the order will execute at the cross-price.