What are the mechanics of spikes and plunges at the open? For example, take Bed, Bath and Beyond $BBBY. They got smashed today on missed earnings and poor guidance. They are down almost 30%; yesterday they closed at $22.2, and opened at $16. That's a lot of price movement when the exchanges was closed! When did all these transactions occur? "at-open" orders? After- and pre-market trading? Dark pools? Look at the volatility spike... the sell orders ate through the book. Where and when is all this trading taking place when markets are closed? Chart by Interactive Brokers
Why does there need to be trading taking place for price to change violently from one day to the next? Prices close at X, next day it opens at Y .... because that is what someone is willing to buy at and someone else is willing to sell at. Period.
The price moved in the after-hours. But, the big volumes come in regular hours. Large trades in thin after-hours only exacerbates a move and can be faded. It is best to have the price validated by the volume that comes in RTH. Particularly in open/close session. Volume validates price.
After the primary market hours are over, many market participants disappear which causes the liquidity to dry up. So even relatively small orders in the after-hours market can cause significant price changes, which is why it's possible to see big gap ups or gap downs at the open of trading the next day.
even if there is no after hours trading, a security can gap to anything. if sellers are lining up at the open to dump shares and there are no offsetting buyers no market maker is going to fill you near yesterdays close, but eventually they'll find a level they feel comfortable buying, in this case 30% down. i bought bbby open today around 16 but was willing to average down.
There was significant volume in the pre-market once BBBY announced earnings (7:45am). Between about 8:45 and 9:29 average volume was about 90,000 shares per minute. On a typical day BBBY only trades about 8,000 shares per minute during regular trading hours.
Thank you for this comment! This is a good lesson learned for me. Wow were you right... Look at that candle in pre-market: Thanks to Interactive Brokers TWS for this chart
the open is based on supply and demand.. Bad earnings means market makers will bid at a price to meet demand; hence a gap down.. the earnings miss caused massive sell orderrs.
Sometimes overnight is a precursor of what to come. Sometimes not. Recall viewing an ETF a bit back... was shown pre-open at "up ~ 6.5%" from prior close. It opened down -1%. It doesn't take much volume on the open to move the stock a bunch when those on the other side of the trade are small fry.