Auction mechanism in Pre-market session – NSE & BSE


Introduction of call option in the pre-market open session:
Price discover is the difficult point in the existing trading system so far at the start of the day in stock market and buyers and sellers are not aware of what will be the fate of their buy and sell requests. So someone gets fat profit and someone get huge loss. In order to streamline this and to help the buyers and sellers about the likely price of the interested shares by matching the buy and sell shares in totality. This will give indicate price of the stock.

Market analysts feel that it is a mechanism that would help deal with volatility in early trades. The investor has an opportunity to put transactions in the terminal in the Trading window of 8 minutes where the investor can see his orders getting matched. The pre-market call auctions have been a mechanism of price discovery in many international markets like NY Stock exchange, NASDAQ, London Stock Exchange, Hong Kong.

For this, first 15 minutes are taken out from the normal trading. This procedure is coming into effect from 19.10.2010 and on 18.10.2010 it will be mock trade and will not have any effect. Now we will see how this will be worked out by exchanges:

  • SMCA (Secondary market Advisory committee) is the brain child behind this by following examples in the world market.
  • The following information will be given in the pre-open session.( from 9 am to 9.15am)
  1. Indicative equilibrium price of the share.
  2. The total buy and sell qty of shares
  3. Indicative index

This is for both Nifty, BSE index shares only.

  • This will be reviewed after 3 months.
  • Pre-open session starts from 9 am and ends at 9.15 am.
  • Out of 15 minutes, first 8 minutes are allotted for order placement, order cancellation and order modification. In the 7th or 8th minute, the order placement, modification and cancellation will be randomly closed and this is system driven. Price band of 20% will be applicable on the scripts.

Note:
The exchanges will discover an ‘Equilibrium price’ for the stocks and the ‘indicative index levels’ during these 7 minutes. While these indicative levels will continue to change through the course of the seven minutes, they will be reflective of the general direction of the market and investors can then accordingly place their bids or cancel their bids.

  • Limit orders and market orders are allowed in the 8 minutes pre-open session which will help to find the indicative price of the scripts. Full quantities of securities are to be given and disclosed qty in parts will not be allowed. After 8th minute, the trades will be executed at the single discovered price for every stock. The opening price for a stock will be the price at which the maximum amount of shares can be traded.
  • Next 4 minutes are for order matching and trade confirmation for the orders placed.
  • Last 3 minutes is for time for exchanges to shift from pre-market operation to regular market operation thus giving indicative price for shares in the regular market and thus enabling persons who want to place order after 9.15 am to know the price they are likely to get from their orders.
  • The equilibrium price shall be the price at which the maximum volume is executable. In case of more than one price meets the said criteria, the equilibrium price shall be the price at which there is minimum order imbalance quantity (unmatched qty). Further in case of more than one price has same minimum order imbalance qty, the equilibrium price will be the price closest to the previous day ending price.

price pur-qty pur-cum-qty sale-qty sale-cum-qty unmatched-qty volume traded
100 0 0 3000 8000 -8000 0
95 2000 2000 3000 5000 -3000 2000
90 3000 5000 1000 2000 3000 2000
85 1500 6500 1000 1000 5500 1000
80 2000 8500 0 0 8500 0
75 1000 9500 0 0 9500 0

The above is an example of first 8 minutes pre-market order position compiled finally. This will be done from first second onwards from 9 am when the stock market opens in order to find out price discovery.

You can notice that purchase qty is added cumulative from top to bottom whereas the sale qty is added cumulatively from top to bottom based on stock price quote by parties for the specified stock in the 8 minutes play.
Unmatched qty is arrived at being the difference between cum Pur qty and sale qty.

The volume traded is arrived at being the difference between buy qty and sell qty for the specified price.
As per the rules formed, the equilibrium price will be fixed based on large volume turnover price. In the above case, large turnover is 2000 but in two different prices. i.e. Rs.95 and Rs.90. Suppose volume tradable was 3000 under Rs.95, then that will be the equilibrium price.

In another case, if 4000 volume tradable under Rs.85 as compared to 3000 volume under 95, then equilibrium price will be Rs.85 only and not Rs.95.

In the above example, top turnover of 2000 comes under two price categories. Hence we have to look into previous closing price rate. The equilibrium price will be the closest price of previous day rate.

  1. If the previous closing rate was Rs. 100, then Rs.95 will be taken as equilibrium price.
  2. If the previous closing rate was Rs. 89, then Rs.90 will be taken as equilibrium price.
  3. If the previous closing rate was midpoint of Rs.95 plus Rs.90, i.e. 92.50, then previous day closing rate will be taken as equilibrium price i.e. Rs.92.50.
  • After discovery of equilibrium price, after 8 minutes, order execution will take place in the following sequence:
  1. Limit orders will be given priority over market orders. Eligible limit buy orders will be matched with eligible sell orders.
  2. Residual limit orders will be matched with market orders.
  3. Finally market orders are matched with market orders.
  • If the equilibrium price is not discovered, then entire orders will be shifted to normal order period after initial 15 minutes.
  • It is important to note that normal trade as per previous practice will be done after 9.15 am for equity and after 9.30 am for derivatives.
  • It is during this time that the trades will be executed at the single discovered price for every stock. The opening price for a stock will be the price at which the maximum amount of shares can be traded.

C. R. Venkata Ramani

(AICWA)

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