How Opening Auctions and Overnight News Create Stock Price Gaps
Summary
A stock’s opening price can differ from the previous close because the two prices are established from different sets of orders and information. The document explains that opening and closing prices are set through auctions. News released while the regular session is closed can change what buyers and sellers are willing to trade at, so the next opening auction may produce a different clearing price from the prior close.
The responses also note that trading can occur overnight in some markets and point to research on overnight returns and market anomalies. The prompt illustrates the issue with a stock that opened below its previous close, while the answers offer no broader data analysis or estimate of how often gaps occur. The explanation therefore covers auction mechanics and information arriving between sessions, with overnight trading as an additional factor; its examples do not establish a general pattern for every market or security.
Key ideas
- Opening and closing prices are formed in separate auctions using the orders available at each time.
- Overnight news can change demand and supply before the next opening auction.
- The last trade before a close and the first trade after it reflect different orders.
- Some markets have overnight trading, which can also contribute to price changes between regular sessions.
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Full text
# How can a share price be different on its open than it was on the previous close? # How can a share price be different on its open than it was on the previous close? The changing in price of shares are down to the number of people buying or selling stock. So, if there is a large demand for a stock then the share price will increase, and if there are lots of people selling stock, the share price will decrease. How then, can the price at the open of one market day be different to the price at the close of the previous market day? Surely if trading is closed between 16:30 and 08:00 then people can neither buy nor sell shares, and hence the share price cannot change. So how then does a share price change overnight? Is it a case of such a large volume of buys/sells as soon as the market opens, that the time taken for a change in price is negligible, so the open price would appear to be different from the previous close? Take for example a share price I was just looking at: Barrick Gold closed at 7.07 on 23 July and opened at 6.96 on 24 July. ## Answer by quant_dev (score 4) https://quant.stackexchange.com/a/19042 The opening and closing prices are set during an auction. If there are overnight news, then the opening auction will reflect information which wasn't there during the closing auction. And even without the auctions, the last traded price yesterday results from different orders than the first traded price today. ## Answer by phdstudent (score 2) https://quant.stackexchange.com/a/19024 There is trading happening overnight. A nice paper is Dong Lou et. al: http://personal.lse.ac.uk/loud/OvernightMom.pdf They explain the overnight trading and actually document that most known anomalies occur on that period. ## Answer by wsw (score 0) https://quant.stackexchange.com/a/19027 Major news can come out during the night. Imagine a company declaring bankruptcy or getting wiped off the map because of a natural disaster. Take a look at the weekly opening gaps in futures and currency pairs.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.