You may have watched on business news channels a pre-open session for NSE and BSE from 9.00 AM to 9.15 AM during market days. But you actually know how your placed orders are executed during this session? It is very interesting and must know factor for all who are interested to invest in stocks.
Before we proceed let us look for the types of orders you can place in market. Their are two types of order placing methods. 1) Market orders-These are the orders where you have not specified any price while buying or selling. Hence such orders execute as per the availing market rates. 2) Limit orders-These are the orders where you have specified the price and quantity for buying or selling. These get executed once find the matching orders.
Pre-open session as I told above starts from morning 9.00 AM to 9.15 AM during the market days. This 15 minutes consists of mainly 3 slots.
1) 9.00 AM to 9.08 AM-Order collection period-During this period you can place the orders, modify or cancel them.
2) 9.08 AM to 9.12 AM-Order matching period and trade confirmation period-During this period placed orders are confirmed based on the price identification method called “Equilibrium price determination” or “Call auction”. Will discuss about these methods below. During this period you are unable to modify or cancel the placed orders.
3) 9.12 AM to 9.15 AM-It is called buffer period and which facilitates transition from pre-open to normal market session.
How Equilibrium Price determination or Call-auction session actually works?
Let us say with example of XYZ stock and previous days closing price of the stock is Rs.100. Now during the market pre-open session types of price and quantity reflect may be as below.
1) Scenario I-We found only one share price with highest trading quantity.
In above case share price with 105 have highest trading quantity with 27,500. Hence it will get executed as equilibrium price or call-auction price.
2) Scenario-II-We found two matching maximum tradable quantity for different share prices.
In above case we found two matching maximum tradable quantity for share price of 105 and 99. In that case minimum unmatched orders quantity is for 105 (8800) than 99 (9000). Hence in this scenario share price 105 is considered as equilibrium price or co-auction price.
3) Scenario-III-We found two matching maximum tradable quantity and same unmatched orders for them too.
From above table we found that for the share price of 105 and 99 we have matching maximum tradable quantity and same unmatched orders. In such scenario previous days close is come into picture. Here I told earlier that previous days close for XYZ is 100 which is nearer to 99 than the 105. Hence in above case 99 is considered as equilibrium price or call auction price.
4) Scenario IV-We found two matching maximum tradable orders with same unmatched orders and share price are equally distanced from previous closing price of share XYZ.
In above case we found that share price 101 and 99 have same maximum tradable quantity and same unmatched orders. Also share prices 101 and 99 are equally distanced from previous days close. In such case previous days close share price 100 is considered as equilibrium price or call-auction price.
Points to remember regarding Pre-open session.
1) After finding the equilibrium price or call-auction price all market orders are executed at the equilibrium price and all no executed limit orders are carry forwarded to open market as it is.
2) Price band of 20% shall be applicable on the securities during pre-open session.
Any comments or suggestions?????