Overnight Market Pops and Snappers

The SEC keeps a list of authorized exchanges. See
http://www.sec.gov/divisions/marketreg/mrexchanges.shtml

This is not a complete list, it is simply a list of exchanges administered by and under the set of rules provided by the SEC.

I looked into the NSX. I can not find how or when they move their data into what Investopedia calls the "consolidated tape". For NYSE and NASDAQ, it's easy because nobody lists their stock on both. But NSX lists stocks concurrently listed on NYSE and NASDAQ.

Looking at NSX volume, their volume yesterday was about 14M shares NYSE, and 9M shares NASDAQ.

It seems that there's a lot of trading activity at the end of the day. That's when the ETF's make their trades, and when the broker-to-broker trades are settled. I suspect that's when the other exchanges' trades get rolled up, but I haven't confirmed that suspicion. The rollup function is provided by clearing and settlement companies, and after they are all done, they report the price for the next trading activity. For a deeper understanding, see

http://www.tradersmagazine.com/news/102263-1.html

This article talks about the settlement activity, and that NASDAQ would be setting up their own settlement operation.

So at settlement time, the price may change. Dramatically.

Suppose broker A has a buy order of stock that it doesn't have. Broker A goes to the settlement house to get the stock. The settlement house may have to go to broker B who has the stock. Broker B may decide that the stock is worth more than the closing price, and transfers it to the settlement house, who sends it off to broker A at the new, higher price. The consolidated tape then reflects the higher price. There is no volume registered for this trade, because the trade volume was already reported during the day. This is just a settlement of that volume.

Now, how does that affect your broker, TDAmeritrade, for example? You bought the stock at a low price during the day, and overnight it pops up. The brokerage house (TDAmeritrade) has to come up with the money to settle the stock, so it's out the delta from when you bought it to the settlement price.

So now you can see how "snappers" happen. A stock who's relative strength compared to the index may be negative, but somebody thinks it's a deal and buys a lot of shares. Overnight, it pops up because of the settlement. In the morning, we all see the pop, and know this one is really weak, so we may short the stock because overnight nothing changed, it's still weak. Maybe it will become strong this quarter or maybe not. But the stock then trades lower, usually back to it's yesterday's trading point. If it's relative strength is negative, it will usually end up being lower than the delta of the index move.

If there's enough "snappers", then the market index "pops".

Don't worry about TDAmeritrade. There will be a Broker C going back to TDA to buy a stock, and TDA will raise the price so it covers it's original loss on your stock. I think it's a zero-sum game, because brokers continue to be in business.

An interesting study would be to screen for stocks that traded over 10X their average daily volume, and see what happens to price overnight.

Just so you guys don't get chart-starved, here's my chart I'm watching:



As you can see, my favorite leading indicator is looking down. Sometimes being oversold is resolved by time, and sometimes it's price. Which one will this be?