The stock markets can be highly volatile during the first few minutes of the market opening due to several reasons:
Overnight news and events: News and events that occur outside of market hours, such as economic data releases or geopolitical developments, can lead to significant price movements when the market opens. This can cause a rush of buying or selling activity in the first few minutes of trading, which can result in volatility.
Opening orders: Investors may place orders to buy or sell securities before the market opens, based on their expectations for the day’s trading. These orders can cause price movements when the market opens and can contribute to volatility.
Market orders: Market orders are orders to buy or sell a security at the current market price. When the market opens, there may be a large number of market orders placed, which can cause price movements and volatility.
Lack of liquidity: During the first few minutes of trading, there may be a lack of liquidity in certain securities or markets, which can result in wider bid-ask spreads and more volatile price movements.
Algorithmic trading: Algorithmic trading refers to the use of computer programs to execute trades based on pre-determined rules. Algorithmic trading can contribute to volatility as these programs can quickly react to changes in the market and execute large trades in a short period of time.
The first few minutes of trading can be highly volatile due to a combination of factors such as news and events, opening and market orders, lack of liquidity, and algorithmic trading. As such, traders and investors should be aware of these potential sources of volatility and exercise caution when trading during this time.