What is a sell imbalance and what is a buy imbalance on the stock market? Which one is good for buyers?

Question

What is a sell imbalance and what is a buy imbalance on the stock market? Which one is good for buyers?

Answer 1

I have never heard those exact terms in the industry, but I have to assume a sell imbalance means more people want to sell, and the opposite for a buy imbalance.

If more people want to sell something, then the value of that "something" declines.  Its the same in houses, hot dogs, and stocks.  If more people are selling, the price goes down.

Vise versa for the buy side....if everyone on the planet wants to buy a certain thing...but there are only a limited number of that thing...it is going to be a very valuable object.  So...apply that to stock.

A company with 300 Million outstanding shares on the market does a good thing, thus creating the buying imbalance, the value of the stock goes up because people are buying something that only has a limited availability.

So, to answer the question, the best time to buy is right after a selling imbalance as it starts to move into a buying imbalance (but...if you can figure out where that is regularly, you're gonna be rich).

Answer 2

Sell and buy imbalances are posted by the specialists at 20 min and again at 10 min before the close of the trading day. These are orders from institutions to sell large blocks of shares at the closing price for the day. If the specialist cannot accomodate these orders they are posted so that individual traders can help unload the shares.

In theory a large buy imbalance will cause a stock to gap up at the closing price to accomodate the order and the reverse would be true for a sell imbalance which should gap down the price of the stock. The way traders profit from the move with a buy imbalance is by buying the stock right before the close and sending an immediate sell on close order. In this way, the buy imbalance is reduced by long traders who are seeking a profit and ease the specialists job.

You should buy the stock and sell market on close for a buy imbalance, and you should short the stock and cover market on close for a sell imbalance.

The larger the imbalance the higher the probability of success, but it is by no means a certainty as anything can happen in the last minutes of trading, furthermore once you place a MOC (market on close) order it cannot be canceled and you can be left to exposed to institutional traders and hedge funds using these imbalances to unload their own large positions.

The best strategy to utilize is to obtain the stock and place the orders within the last 3 or 4 minutes of trading, thereby minimizing your time exposure. Also the best times to utilize this strategy are during index rebalancings such as in the S&P and the Russell. Many index funds need to rebalance their portfolios at this time generating large imbalances.