Imbalance of Orders: Definition, Causes, Trading Strategies

What Is an Imbalance of Orders?

An imbalance of orders exists when there are too many orders of a listed security that cannot be fully matched by the opposite order on an exchange. This applies to either buy, sell, or limit orders. An imbalance of orders is also referred to as an "order imbalance."

Understanding an Imbalance of Orders

Shares experiencing an imbalance of orders may be temporarily halted if trading has already commenced for the day. If the imbalance occurs prior to the market open, trading may be delayed. Better-than-expected earnings or other unexpected good news can result in a surge in buy orders in relation to sell orders.

The good news would increase the demand for a security and would also make it attractive to hold onto. Likewise, unexpected negative news can bring a large sell-off and little demand for a security that does not look promising.

For securities that are overseen by a market maker or specialist, shares may be brought in from a specified reserve to add liquidity, temporarily clearing out excess orders from the inventory so that the trading in the security can resume at an orderly level. Extreme cases of order imbalances may cause suspension of trading until the imbalance is resolved.

Why Imbalance of Orders Occur

Imbalances of orders can often occur when major news hits a stock, such as an earnings release, change in guidance, or merger and acquisition activity. Imbalances of orders can move securities to the upside or downside, but most imbalances get worked out within a few minutes or hours in one daily session.

Smaller, less liquid securities can have imbalances that last longer than a single trading session because there are fewer shares in the hands of fewer people. Investors can protect themselves against the volatile price changes that can arise from imbalances by using limit orders when placing trades, rather than market orders.

As each trading day draws to a close, imbalances of orders can arise as investors race to lock in shares near the closing price. This can especially come into play if the stock price is seen at a discount on that particular trading day.

Investors who want to avoid such order imbalances might try to time their orders in advance of the wave of buyers and sellers that may come in late in the session. Timing orders or market movements, in general, is very difficult to do, so investors have to be ready to accept any possible losses or missed opportunities.

Special Considerations

Other factors that can lead to imbalances of orders include legislation that gains momentum, which could affect a company’s operations and business model. Companies that use newer technology and platforms that have outpaced existing laws may be particularly susceptible to this as regulators play catch-up and in the process introduce rules that can cut into their profit margins.

If there is a notification of an imbalance of orders with too many buy orders, holders of the stock might seize the opportunity to sell some of their shares and take advantage of the increased demand and realize a lucrative return on investment. Conversely, buyers might attempt to take advantage of an overabundance of sell orders.

Markets move constantly and are impacted by a variety of factors, such as news, intuition, analysis, legislation, wars, etc. Every investor and trader will have a different outlook so if an order imbalance does exist, it is usually gone very quickly due to the efficiencies of free markets.