Opening Cross
Candlefocus EditorAt the opening cross, buyers and sellers place orders with their respective bids and offers. The bid is the price at which a buyer is willing to buy and the offer is the price at which the seller is willing to sell. The bid and offer are then compared until the prices match, resulting in a trade. On the Nasdaq, the opening cross is conducted by a designated market maker (DMM), with supplemental orders from other market professionals. The DMM will set the opening price, using their best judgement to reflect the market sentiment.
The design of the opening cross is meant to provide all investors with the same information at the market open. It offers a degree of transparency and prevents surprises caused by certain market abnormalities. For instance, the process would make it difficult for a single investor to purchase or sell a large amount of stock without influencing the price, as the auction process requires buyers to provide reasonable offers and prevents sellers from asking outlandish prices.
Although it serves a vital role in the stock market, the opening cross is a relatively short process, typically conducted between 30-90 seconds. This is just enough time for the DMM to negotiate reasonable prices for trades and determine the opening price of the stock.
In conclusion, the opening cross is an important process that helps to keep the stock market transparent, equitable and efficient. The design of the process prevents market distortion, encourages the submission of reasonable bids and offers and helps to set the price of stock at the market open.