Pre-open session to be introduced by NSE and BSE

SEBI vide CIR/MRD/DP/21/2010 dated July 15, 2010 has decided to introduce call auction mechanism in pre-open session. The pre-open session would be introduced on a pilot basis by BSE and NSE for the scrips forming part of Sensex and Nifty. The pre-open session would be for a duration of 15 minutes i.e. from 9:00 a.m. to 9:15 a.m., out of which 8 minutes would be allowed for order entry, order modification and order cancellation, 4 minutes for order matching and trade confirmation and the remaining 3 minutes would be the buffer period to facilitate the transition from pre-open session to the normal market.

Susan Thomas of Indira Gandhi Institute of Development Research in her recently published research paper Call auctions: A solution to some difficulties in Indian finance explains the concept of call auctions as follows:

“A call auction is an alternative mechanism through which electronic trading can be organised. It involves two critical differences. First, instead of a continous matching of orders, there is a period of time in which orders are accepted but no trades take place. Second, it is a `single price auction'. At the end of the call auction, all orders which can be matched are traded at a single price. A provisional market clearing price is computed as the intersection of supply and demand curves during the period of the call auction. It is the single price at which the maximal number of securities can be traded, given the orders present in the book at that point in time. It is displayed in real time on the computer screen. After a certain time period, the call auction is ended, and all orders which can be matched at this single price are executed. Call auctions can run for different periods, starting from as short as a minute. Once single-price matching has been done for an order book, there could be orders left in it that cannot be matched. These orders could be the natural starting point for continuous order matching.”

Thus in the call auction, buy and sell orders on the selected stocks (scrips forming part of Sensex and Nifty) would be collected for the first 8 minutes and order matching and trade confirmation would happen in the next 4 minutes. The equilibrium price would be the price at which the maximum volume is executable. In case more than one price meets the said criteria, the equilibrium price would be the price at which there is minimum order imbalance quantity (unmatched order quantity).

A copy of the circular is available here.