Trade imbalances can serve as potential profit opportunities and show positions with an especially high amount of risk.
Order imbalances exist when orders to buy or sell a security far outweigh the current supply. These situations usually last for just a few moments because the announcement fuels a wave of liquidity and the market maker can use reserved shares to resume normalcy. In the most extreme cases, trading can be halted until the imbalance is resolved.
However, this profit taking is far from easy. Dennis Dick of Bright Trading explains, “In this HFT world, many algorithmic systems will manipulate these closing imbalances, and sometimes in the last minute or two they will flip, causing a sell imbalance to go to a buy imbalance. If that happens it catches many imbalance traders by surprise. Sometimes these imbalance plays get crowded as well. And if too many imbalance players are on the same side of the trade, the imbalance could also flip.”
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