A market-on-close (MOC) order refers to a market order that is not subject to a limit. Traders execute market-on-close orders as close to the closing price of a stock as possible. It is placed either at the exact time of the market closing or slightly after the market closes.
Market-on-close orders are done to achieve the last possible price of that trading day, in anticipation of stock price movements in the next trading day. MOC orders cannot be made in all financial markets; neither can they be executed by all brokers.
A market-on-close (MOC) order refers to a market order that is not subject to a limit.
Market-on-close orders enable investors to trade in securities in different time zones.
They enable investors to minimize losses due to negative price movements in their holdings that can occur overnight. However, they carry risks due to end-of-the-day price fluctuations and trading clusters.
How do Market-on-Close Orders Work in Real Life?
Consider the example of the New York Stock Exchange. Traders are required to submit their market on close orders by 3:45 p.m. EST. On Nasdaq, traders are required to submit their orders by 3:50 p.m. EST since the market closing time is 4:00 pm.
At 4:00 p.m., traders are not allowed to cancel their market-on-close orders or even modify them.
Advantages of Market-on-Close Orders
There are a variety of situations wherein an investor will want the closing price of a given stock. It can happen when an investor expects the price of the stock to move drastically over a short time period, generally overnight.
It is usually the result of a hugely anticipated news story, i.e., if a company announced a follow-on public offering, or if central banks announce subsidies for an industry.
Even a scheduled after house earnings call can cause drastic price appreciations in the stock market. Thus, placing a market-on-close order will ensure that the purchase that the investor wants is executed before the news break or the start of the next trading day.
Market-on-close order can also be great in situations where an investor is aware that there will be difficulties in executing a particular transaction at a given time. For example, it can be impossible to exit a position at the end of the day.
Lastly, if an investor is interested in trading in securities that are listed on foreign exchanges that are not in the same time zone where the investor lives, being able to place market-on-close orders will be extremely useful.
Disadvantages of Market-on-Close Orders
One of the biggest drawbacks of a market-on-close order is that the investor lacks information about the price at which their order is filled. It, however, only happens in situations where the investor is not available at the close of the market.
Market-on-close orders also come with the risk of end-of-the-day price fluctuation, which is frequent in the stock market.
MOC orders also run the additional risk of being poorly executed because of the formation of end-of-the-day trading clusters, which are essential when a large volume of pending orders get piled up on the stock market. However, the circumstance is incredibly rare.
Example of a Market-on-Close Order
Consider a situation where a trader holds 50 shares of stock Alpha. Even though Alpha’s stock price has not shown drastic price movements during the trading day, the company is expected to report negative earning soon after the closing bell of the exchange.
The trader can place a market-on-close order to sell either a fraction or all their holdings in Alpha. In such a way, they may be able to minimize their losses from a massive overnight sell-off of the shares.
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