How do market makers make money on opening and closing crosses if there is no spread?

C

canadian_dude

In the last couple days I have flattened my long and short day trades with Market On Close (MOC) orders on Super Montage. So far I have found it an effective way to flatten positions in small and mid cap Nasdaq stocks.

But I am puzzled by exactly how this trading process works. I am putting in MOC orders through Super Montage. My understanding of that process is that my order is matched against other MOC orders that are taking the opposite side of the trade.

Since there is only one single price (i.e. the closing price) that will be assessed to both those buying and those selling at MOC, that means there is no spread between the buy and sell side.

So how does the market maker (or forum where the trade takes place) make any money on these types of transactions in the absence of a spread?
 
My guess would be that they can assign the MOC price to be artificially low (and participate on the buy side) and then flip the shares on the open (MOO) the next morning for a profit.
 
Quote from sprstpd:

My guess would be that they can assign the MOC price to be artificially low (and participate on the buy side) and then flip the shares on the open (MOO) the next morning for a profit.
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That logic seems a bit too simple. If that was the case, wouldn't both retail and institutional investors simply buy a large basket of stocks with MOC orders, and then sell them back with MOO orders? If what you said was true, then I think institutions would already be arbitraging with this type of trading.

Also an article I read stated the official closing price represents the last trading price on the Nasdaq exchange, but fails to take into account any of the simultaneous trading occurring on the ECN's. So if the MOC price was artificially low, then I could buy a lot of MOC orders and simultaneous sell them off on the ECN's for an instant profit. But that does not seem to be the case. The MOC prices seem to be fairly much in line with the ECN pricing at that moment when the closing bell rings.

Does anyone else have any theories? How are they making money on MOO and MOC orders in the absence of a spread?
 
Nasdaq is different than NYSE. I am not sure of the stats, but I don't believe a lot of volume goes off on the opening/closing crosses of Nasdaq stocks compared to listed stocks. Has anyone had good experiences with MOO and MOC orders on Nasdaq?

The specialist gets to see all of the MOC orders coming in. If there is no imbalance, they can just match buy and sell orders and take no risk themselves (and get no profit). However, if there is an imbalance, and nobody else is stepping up to counter the imbalance, then they are going to take risk by being the counterparty to the trade. In this case, I assume for their own survival they will artificially lower/raise the price for the closing price. Then the next morning they would attempt to open the market at a price advantageous to the position from the day before.

I am pretty sure some traders do try to look for closing imbalances to see if they can take the side of the specialist on the closing print. I remember reading on EliteTrader that there were some unreal examples of this during the 2000 blowoff. I don't know how often this occurs now though.

I think you are answering your own question - obviously they don't make any money on the spread, so if they are to make money on the opening and closing crosses, then they have to do it by manipulating price. That is why there are threads on EliteTrader about trading using NYSE opening orders. They are trying to exploit price manipulation by the specialist.
 
Uh, what makes you think the 'market makers' have to make money every time theres a trade????

Uh, what market maker makes money when you and I trade on INET?

Uh, learn something about the biz before espousing all kinds of crackpot theories.
 
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