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I am having some problems understanding stock exchange opening auction imbalances. In Trading and Exchanges by Larry Harris, section 24.5.7 The Market Open, page 508:

Specialists conduct the opening single price auction at the NYSE. When the order flow at the open is imbalanced, as it often is, specialists step in to supply liquidity on the weak side of the market. Since this side is weak, the market-clearing price generally favors it. For example, if traders want to buy more than they want to sell at the previous closing price, the market-clearing price will be lower than the previous close, and the specialist will typically be a buyer. [...]

I don't understand the part in bold.

  • How will the "market-clearing price be lower than the previous close" when there is more buy volume than sell volume?

  • If traders want to buy more than they want to sell, doesn't it mean that the sell side is weak and that the specialist will step in on the sell side to balance out the buy side? The quote above seems to claim exactly the opposite. It seems to claim that the specialist will be a buyer even when other traders want to buy more than they want to sell. If the specialist is a buyer when there is already more buy volume, wouldn't the imbalance get worse?

What am I missing?

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  • The quote makes no sense. Market makers are required to provide liquidity by taking the opposite side of whatever trades are occurring at any given point in time. Dec 5, 2020 at 15:26

1 Answer 1

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I found the book's errata on the author's old website (archived link screenshot). The author made a mistake. It should be:

For example, if traders want to buy more than they want to sell at the previous closing price, the market-clearing price will be higher than the previous close, and the specialist will typically be a seller.

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