Wednesday, October 20, 2010

Pre-Market Call Auctions Trading

There is yet another change in market timings, but this one will not make you wake up earlier. The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) have decided to implement ‘pre-market call auctions’ which is a special 15-minute trading window starting at 9:00 am from October 18. 

This also means that all other segments, including derivatives and non-index stocks, will trade only at 9:15 am. 

Both the exchanges have already received the go-ahead from market regulator the Securities and Exchange Board of India (Sebi) to start the ‘pre-market call auctions’. 

The aim of this exercise is to enable better price discovery in the market. Sayee Srinivasan, head–product Strategy at BSE, says, “The call auction is the solution to take care of the uncertainty that is there in people’s mind about where a stock should be priced at the open.” 

So how does this work? Here is the break-up of these 15 minutes. At 9:00 am, investors will be able to place their ‘buy’ and ‘sell’ orders for Nifty or Sensex stocks for a period of seven minutes. During these seven minutes, no trades will be executed. 

However, the exchanges will discover an ‘indicative price’ for these stocks and the ‘indicative index levels.’ 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. 

What is also interesting is that if based on these indicative prices investors wish to change or cancel their orders they will be allowed to do so. The exchanges will suddenly halt this order-taking randomly between 9:07 and 9:08 am in order to check any market manipulation. 

After this stoppage, till 9:12 am orders will be matched and opening prices of the stocks and the opening levels for the indices will be discovered. 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. 

Extreme care has also been taken to combat volatility. While during the auction period there is no provision for a circuit filter, a 20% price band will be applicable on all bid prices.