Pre-Market_Call_Auction

PRE-MARKET CALL AUCTION CONTENTS PAGE Acknowledgement 2 1. Introduction 4 2. Pre-Open 5 3. Significance of Pre-Open Session 5 4. List Of Securities 6 5. Trading Hours 8 6. Trading Session 9 a. Order Collection Period b. Order Matching Period 7. Order Types Permitted During Pre-Open 10 8. Determination Of Equilibrium / Opening Price 11 9. Unmatched Order 12 10. Risk Management 13 11. Market Information Disseminated During Pre-Open 14 Bibliography 13 INTRODUCTION In a move to reduce price swings, India's two largest stock exchanges will allow investors to put in bids for shares before the bourses open. The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) have decided to implement the 15-minute 'pre-market call auctions' window from Monday, October 18, 2010. 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 issue regarding call auction and its use in various session, including pre-open session was deliberated in Secondary Market Advisory Committee (SMAC). Based on the recommendation of the committee and proposal received from the stock exchanges, it has been decided to introduce call auction mechanism in pre-open session. Price discovery is a difficult proposition in the existing trading system. So far, at the start of the day in stock market, buyers and sellers are not aware of what will be the fate of their buy and sell requests. So someone gets a fat profit and someone gets a huge loss. In order to streamline this and to help the buyers and sellers give an idea about the likely price of the interested shares, the buy and sell share quantities are matched in totality. This will give indicative price of the stock. The aim of this exercise is to enable better price discovery in the market. 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. 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 etc. PRE-OPEN Pre-open is a session to discover the opening price of the security to be traded. The opening price will be the equilibrium price based on the demand and supply of the security and not on the price of the first trade for the security. SIGNIFICANCE OF PRE-OPEN SESSION In the morning when there is no trading and you have to start trading you are trying to discover what the correct price is of a security. Most markets around the world try to get as many buyers and sellers together at that moment to try to discover what the price is through an auction. India, in recent years has been pretty unusual, and that we don’t have a call auction or a collection of all the buyers and sellers at that moment. We just start matching orders and have the first trade be the first price that’s discovered. It is generally viewed as kind of theoretically and practically that if you can put all the orders together and let the buyers and sellers name their price and then match as many orders as possible at that single price, which is really what a call auction is, then you start the day with a truer price or more accurate or better price. This reduces the quantum of volatility, typically visible in the first few minutes of trade, after that price has been discovered. Market experts believe that the introduction of pre-open session assumes special significance, especially, in situations when there is any major event or announcement comes overnight before market opens. Such special events may be such as merger and acquisition announcements, open offers, delisting, debt-restructurings, credit-rating downgrades or any rumours regarding any of such events. On a normal day with no major event before 9:00 AM, this pre-open session may appear to be a non-event and a routine exercise. However, on a day when there is any major outcome before the market hours this mechanism assumes special significance. Introduction of pre-open session in Indian markets also ensures its integration with the international markets. Experts believe this mechanism will help retail as well as institutional investors. This system will reduce price volatility due to multiple matching of orders at a single price, better price discovery and also dilute market impact. Another advantage of this mechanism is a fairer market especially for small, non-professional investors because all trades get executed at the same price. The call auction provides greater liquidity due to deeper demand supply schedule, leads to better price discovery, reduced market impact and simultaneity of trades eliminates possibility of front-running customer orders. LIST OF SECURITIES To begin with, pre-open session shall be introduced on a pilot basis by BSE and NSE for the scrips forming part of Sensex and Nifty. In case of any change in the composition of Sensex and Nifty, pre-open session shall be introduced for such incoming scrips. Pre-open session shall also continue for the scrips moving out of Sensex and Nifty, though they will not be reckoned for the computation of the index. List of Securities | Sr.No | Security Name | Symbol | ISIN Code* | 1 | ACC Ltd. | ACC | INE012A01025 | 2 | Ambuja Cements Ltd. | AMBUJACEM | INE079A01024 | 3 | Axis Bank Ltd. | AXISBANK | INE238A01026 | 4 | Bajaj Auto Ltd. | BAJAJ-AUTO | INE917I01010 | 5 | Bharat Heavy Electricals Ltd. | BHEL | INE257A01018 | 6 | Bharat Petroleum Corporation Ltd. | BPCL | INE029A01011 | 7 | Bharti Airtel Ltd. | BHARTIARTL | INE397D01024 | 8 | Cairn India Ltd. | CAIRN | INE910H01017 | 9 | Cipla Ltd. | CIPLA | INE059A01026 | 10 | DLF Ltd. | DLF | INE271C01023 | 11 | Dr. Reddy's Laboratories Ltd. | DRREDDY | INE089A01023 | 12 | GAIL (India) Ltd. | GAIL | INE129A01019 | 13 | HCL Technologies Ltd. | HCLTECH | INE860A01027 | 14 | HDFC Bank Ltd. | HDFCBANK | INE040A01018 | 15 | Hero Honda Motors Ltd. | HEROHONDA | INE158A01026 | 16 | Hindalco Industries Ltd. | HINDALCO | INE038A01020 | 17 | Hindustan Unilever Ltd. | HINDUNILVR | INE030A01027 | 18 | Housing Development Finance Corporation Ltd. | HDFC | INE001A01036 | 19 | I T C Ltd. | ITC | INE154A01025 | 20 | ICICI Bank Ltd. | ICICIBANK | INE090A01013 | 21 | Infosys Technologies Ltd. | INFOSYSTCH | INE009A01021 | 22 | Infrastructure Development Finance Co. Ltd. | IDFC | INE043D01016 | 23 | Jaiprakash Associates Ltd. | JPASSOCIAT | INE455F01025 | 24 | Jindal Steel & Power Ltd. | JINDALSTEL | INE749A01030 | 25 | Kotak Mahindra Bank Ltd. | KOTAKBANK | INE237A01028 | 26 | Larsen & Toubro Ltd. | LT | INE018A01030 | 27 | Mahindra & Mahindra Ltd. | M&M | INE101A01026 | 28 | Maruti Suzuki India Ltd. | MARUTI | INE585B01010 | 29 | NTPC Ltd. | NTPC | INE733E01010 | 30 | Oil & Natural Gas Corporation Ltd. | ONGC | INE213A01011 | 31 | Power Grid Corporation of India Ltd. | POWERGRID | INE752E01010 | 32 | Punjab National Bank | PNB | INE160A01014 | 33 | Ranbaxy Laboratories Ltd. | RANBAXY | INE015A01028 | 34 | Reliance Capital Ltd. | RELCAPITAL | INE013A01015 | 35 | Reliance Communications Ltd. | RCOM | INE330H01018 | 36 | Reliance Industries Ltd. | RELIANCE | INE002A01018 | 37 | Reliance Infrastructure Ltd. | RELINFRA | INE036A01016 | 38 | Reliance Power Ltd. | RPOWER | INE614G01033 | 39 | Sesa Goa Ltd. | SESAGOA | INE205A01025 | 40 | Siemens Ltd. | SIEMENS | INE003A01024 | 41 | State Bank of India | SBIN | INE062A01012 | 42 | Steel Authority of India Ltd. | SAIL | INE114A01011 | 43 | Sterlite Industries (India) Ltd. | STER | INE268A01049 | 44 | Sun Pharmaceutical Industries Ltd. | SUNPHARMA | INE044A01028 | 45 | Suzlon Energy Ltd. | SUZLON | INE040H01021 | 46 | Tata Consultancy Services Ltd. | TCS | INE467B01029 | 47 | Tata Motors Ltd. | TATAMOTORS | INE155A01014 | 48 | Tata Power Co. Ltd. | TATAPOWER | INE245A01013 | 49 | Tata Steel Ltd. | TATASTEEL | INE081A01012 | 50 | Wipro Ltd. | WIPRO | INE075A01022 | | *ISIN - International Securities Identification Number This framework for call auction shall be reviewed after 3 months from the commencement of the pre-open session. TRADING HOURS The pre-open session shall be duration of 15 minutes i.e. from 9:00 am to 9:15 am, out of which 8 minutes shall be allowed for order entry, order modification and order cancellation, 4 minutes for order matching and trade confirmation and the remaining 3 minutes shall be the buffer period to facilitate the transition from pre-open session to the normal market. The session shall close randomly during last one minute of order entry i.e. anytime between 7th and 8th minute of the order entry. Such random closure shall be system driven. Accordingly, Normal Market / Odd lot Market and Retail Debt Market will open for trading after closure of pre-open session i.e. 9:15 am. The market timings have thus been moved by 15 minutes to accommodate Pre-open, as follows: Cash Market Normal Trading – 9.15 AM To 3.30 PM Odd Lot Market – 9.15 AM to 3.30 PM Retail Debt Market – 9.15 AM to 3.30 PM Securities Lending & Borrowing Scheme – 9.15 AM to 3.30 PM Derivatives Market – 9.15 AM to 3.30 PM Block Trading Session – 35 minutes after normal market opens viz. 9.15 AM to 9.50 AM However, the Currency Derivatives Market will operate in its usual timings viz. 9 AM to 5 PM, same as today. TRADING SESSION Pre-open session shall comprise of two sessions viz. • Order collection period. • Order matching period. ORDER COLLECTION PERIOD • The order collection period is defined as the timing of pre-open session. During this period orders can be entered, modified and cancelled. 8* minutes shall be provided for order entry, modification and cancellation. (* - System driven random closure between 7th and 8th minute) • Both Limit and market order will be allowed. • The information like Indicative equilibrium / opening price of scrip, total buy and sell quantity of the scrip, Indicative NIFTY Index value & % change of indicative equilibrium price to previous close price shall be computed based on the orders in order book and shall be disseminated during pre-open session. ORDER MATCHING PERIOD • Order matching period will start immediately after completion of order collection period. • Order will be matched at a single (equilibrium) price which will be open price. • The order matching will happen in following sequence - Eligible limit orders will be matched with eligible limit orders - Residual eligible limit orders will be matched with market orders - Market orders to will match with market orders • During order matching period order modification, order cancellation, trade modification and trade cancellation will not be allowed. • The trade details will be disseminated to respective members before the start of normal market. ORDER TYPES PERMITTED DURING PRE-OPEN Limit price orders and market price orders (ATO - At The Open) shall be entered during the pre-open session and both shall be reckoned for computation of equilibrium price. The following orders are not allowed during the pre-open: * Iceberg Orders A large single order that has been divided into smaller lots, usually by the use of an automated program, for the purpose of hiding the actual order quantity. * DQ (Disclosed Quantity) Orders An order in which only a part of the order quantity is disclosed to the market. The next part is automatically released after the previous order quantity is fulfilled and so on till the full order is executed. * IOC (Immediate Or Cancel) Orders An order requiring that all or part of the order be executed immediately after it has been brought to the market. Any portions not executed immediately are automatically cancelled. DETERMINATION OF EQUILIBRIUM / OPENING PRICE • The opening price (OP) shall be determined based on the principle of demand supply mechanism. • The equilibrium price (EP) will be price at which the maximum volume is executable. • In case more than one price meets the said criteria, the equilibrium price will be the price at which there is minimum order imbalance quantity (unmatched order quantity). The absolute value of the minimum order imbalance quantity will be taken into consideration. • In case more than one price has same minimum order imbalance quantity, the equilibrium price will be the price closest to the previous day’s closing price. In case the previous day’s closing price is the mid-value of pair of prices which are closest to it, then the previous day’s closing price itself will be taken as the equilibrium price. In case of corporate action, previous day’s closing price will be the adjustable closing price or the base price. • Both limit and market orders shall reckon for computation of equilibrium price. • The equilibrium price determined in pre-open session is considered as open price for the day. • In case of only market orders exists both in the buy and sell side, then order shall be matched at previous days close price or adjusted close price / base price. Previous day’s close or adjusted close price / base price shall be the opening price. • In case of no price is discovered in pre-open session, the price of first trade in the normal market shall be the open price. Explanation: A scenario may arise, wherein; more than one price may have same minimum imbalance quantity. Example on the same is given hereunder: Price | Buy(Qty.) | CumulativeBuy Qty. | Sell(Qty.) | Cumulative Sell Qty. | UnmatchedQuantity | Volumetradable | 106 | | 0 | 3000 | 8000 | ‐8000 | 0 | 103 | 2000 | 2000 | 3000 | 5000 | ‐3000 | 2000 | 96 | 3000 | 5000 | 1000 | 2000 | 3000 | 2000 | 94 | 1500 | 6500 | 1000 | 1000 | 5500 | 1000 | 92 | 2000 | 8500 | | 0 | 8500 | 0 | 90 | 1000 | 9500 | | 0 | 9500 | 0 | In the said example 103 and 96 are the prices wherein, the volume tradable and unmatched quantity is the same. To derive the equilibrium price, the said prices i.e. 103 and 96 which is closest to the previous day’s closing price shall be considered. In case the previous day’s closing price is 95, then, 96 may be considered as the equilibrium price. In case the previous day’s closing price is 105, then, 103 may be considered as the equilibrium price. In case the previous day’s closing price is 99.5 which is the mid-value of 103 and 96, then the equilibrium price shall be the previous day’s closing price i.e. 99.5. UNMATCHED ORDER In case of pending unmatched orders in pre-open session, they shall be shifted to the order book of the normal market following time priority. Limit orders will be at limit price and market orders will be at the discovered equilibrium price. If the equilibrium price is not discovered in pre-open session then the orders entered in the pre-open session will be shifted to the order book of the normal market at previous day’s close price or adjusted close price / base price following price time priority. The price of the first trade in the normal market shall be the opening price. RISK MANAGEMENT The current risk management system shall remain active. All orders received in pre-open session shall be validated at the applicable margins for sufficiency of available capital prior to acceptance of the orders. If the available capital of the member is insufficient to cover the margin requirement of the order placed, the same shall not be accepted for the pre-open session. Only those orders that satisfy the margin requirement shall participate in the Pre-open session. The existing risk management framework shall be applicable for trades resulting from pre-open session and trades during the normal market session. MARKET INFORMATION DISSEMINATED DURING PRE-OPEN The following information shall be disseminated during pre-open session: a) Market depth b) Indicative equilibrium price (EP) or open price (OP) of the scrip c) Indicative cumulative buy and sell quantity of the scrip d) Indicative NIFTY Index value e) Percentage change of EP or OP to previous day’s close price BIBLIOGRAPHY http://economictimes.indiatimes.com/markets/stocks/market-news/15-minute-pre-market-call-auctions-to-start-on-October-18/articleshow/6709813.cms'curpg=1 http://www.moneycontrol.com/news/market-news/pre-market-call-auctionday-1-creates-chaos_492138.html http://www.safeecollege.com/'p=6036 http://www.moneycontrol.com/news/market-news/pre-mkt-call-auctions-will-give-better-price-discovery-bse_491407.html http://www.allbusiness.com/banking-finance/financial-markets-investing/15211217-1.html http://www.financialhub.in/tag/price-discovery http://www.mydigitalfc.com/stock-market/pre-open-call-auction-start-two-weeks-822 http://ramadvice.wordpress.com/2010/10/17/auction-mechanism-in-pre-market-session-nse-bse/ http://answers.yahoo.com/question/index'qid=20080219005316AAA6YVV http://www.indiastudychannel.com/resources/49656-Circuit-Limit-Breaker-System-Stock-Market.aspx http://www.nseindia.com/content/pre_open/cmtr15981.pdf http://www.nseindia.com/content/pre_open/SEBI_circ_150710.pdf http://www.nseindia.com/content/pre_open/PreOpen-October2010.pdf