[khold_stare]

Worked in HFT for a few years. The reason why most markets are not open 24 hours is more human, and just historical - aligned with people's 9-5 workday. There are also pre open and post close sessions of trading but it's much less liquid. Futures markets are open almost 24 hours. Even there, it's down for some time daily. Personally I think it's actually inertia that keeps existing markets this way - the systems of the exchanges and participants were designed with the assumption that they will have daily downtime, so it's hard to change. It's also dependant on how banking and settlement works - a lot of stuff happens after the trading ends. Batch processes run as different institutions settle their trades between each other, etc etc.

Now, as a result, there needs to be a way to set the opening price and closing price, like a bootstrap process. A smaller version of this process actually happens every time a stock gets halted and resumed.

An exchange has an order book - orders of things people want to buy and sell at different prices. During normal operation the buy and sell orders don't overlap in the order book - if two people want to buy and sell at the same overlapping price, they just get matched by the exchange at that moment. Unmatched orders stay in the order book data structure until a matching order comes along. The "price" you see in charts is just the midpoint between the highest buy and lowest sell price in the order book.

Now, if the order book is empty, what the heck is the price? That's what the opening auction needs to solve. The way it works is that people can start placing orders ahead of the opening bell, but they won't get matched until the open. So before the open, the order book is getting filled with orders, but crucially the _orders will overlap_. This "crossed" order book is a no no during normal trading, but ok before the opening auction. When the auction comes, a price is picked which maximizes the amount of orders filled (it's more nuanced than that, but bear with me). Imagine you pick a price in the overlapping region of the order book - every buy order that has a higher price than that will match with every sell orders that has a price lower than that. They will get matched and executed at the opening price, and BAM, you have an uncrossed order book, full of orders.

If the auction doesn't happen, and you just open the stock, then all hell breaks loose. Many things can go wrong here. Firms connected to the exchange may have code that assumes a book is not crossed (or at least not as crossed as it would be during an auction) causing wild behavior. The exchange itself could start matching orders haphazardly in the overlapping region, causing those "price swings" that the article talked about.

Can't imagine the panic that day haha.

[jrochkind1]

Very helpful and clear, thank you.

> Now, as a result, there needs to be a way to set the opening price and closing price, like a bootstrap process. A smaller version of this process actually happens every time a stock gets halted and resumed.

So this suggests that if you did have a hypothetical exchange that ran 24/7... and something unusual happened to make trading halt completely (which always is going to happen occasionally, whether 9/11 level or more frequently)... you would still need to have that "bootstrap" process in place to re-start trading.

But if you normally ran 24/7, you'd have a process that you maybe had never used, or hadn't used in years!

This maybe provides another justification that isn't just historical for having exchanges shut down every day. So you are at least testing the bootstrap process daily, you don't have a bootstrap process you're going to need in an emergency (the worst time to have further problems) that has actually just been sitting around unused for years!

(Reminding me of making sure you test your backup and continuity processes regularly, right? And the irony here is that it's the backup/continuity processes which are alleged to have caused the issue here! but still, you need the backup/continuity processes...)

[johnbcoughlin]

Matt Levine suggested that the chaos after opening was mainly due to market orders executing at ridiculous prices. Like, a limit buy for half the "real price" is the first buy order to get in the door, and that gets matched with a market sell order.

Does that track with your understanding?

[khold_stare]

Yes! I almost forgot about market orders because trading firms never use market orders for this exact reason - you have no control over the price if things go bad. Most flash crashes are exacerbated by runaway market orders and stop orders for example.

A buy market order would try to match with the "best price" which in a deeply crossed book would mean matching with a really low priced sell order. Exchanges match orders in price-time priority. Similar is true for a market sell order - would match at an extreme high price.

Besides the midpoint of the order book, another metric for a "current price of the stock" people use, is the "last trade price". In the situation above you would get "swings" in the price because market orders would be trading very high and very low if they alternate between buying and selling. The data structure on the exchange itself isn't "swinging", it's just the overlapping region being slowly eroded by market orders. The "last trade price" metric looks really insane in this situation.