What Is an Order Imbalance?

An order imbalance is a term that is typically utilized to identify situations within the marketplace in which the number of buy and sell orders for a particular asset are significantly different. When this type of imbalance in the market exists, it is not possible to match up the orders to buy with the orders to sell and thus fulfill those outstanding orders. While some steps may be taken to remedy the situation and allow the market time to right itself, a particularly severe order imbalance may result in suspending trading on that security for a period of time.

There are a number of reasons why an order imbalance could develop. One of the more common situations involves the release of some major news that has to do with the issuer of a security. Depending on the nature of that news release, investors may flock to buy up any available shares, quickly exhausting the supply within the marketplace. Alternatively, investors may attempt to sell off their shares, creating a glut of available stock within the marketplace without anywhere near enough demand to absorb those orders to sell.

Typically, an order imbalance will only last for a short period of time, possibly no more than a few minutes. When this is the case, the impact on the market is minimal. Should the imbalance continue for longer periods of time, such as a few hours, this set of circumstances can create issues within the market and may lead to a suspension of trading on that particular security for the rest of the trading day. This effectively provides the chance for everyone involved in the creation of the order imbalance to step back from the situation and reconsider their options. In addition, this temporary suspension can also provide the issuer of the stock the chance to release more shares in the marketplace, a strategy that can be very helpful if there is a high demand for the security that cannot be met by the currently available supply.

One approach that allows investors to somewhat insulate themselves from losses due to an order imbalance is to submit what is known as limit orders. Orders of this type instruct brokers to execute certain purchases and sales, when and as the price of a security enters a certain range. These orders may also be structured with a time limit. This means that if the limit order calls for the purchase or sale of a security within a certain price range and by a certain date, the order will expire if those criteria are not met.