Many people in the country and across the globe are interested and invested in equity trading, which is one of the most fluctuating and volatile markets in the economy. The BSE and NSE share market trading introduced a session to reduce its volatility. The proverbial session is known as the Pre-open session, or the call auction session at the stock market. Since this is such an important aspect of stock trading, investors can benefit greatly if they learn how to invest in the stock market by utilising even the pre-open trading session.
Discussed below in detail is everything you need to know about the Pre-open Session and how it works.
Meaning of Pre-open Session
The BSE and NSE introduced the pre-open or call auction session on the 18th of October, 2010. This trading session was meant to improve liquidity in the markets as well as balance the volatile shifts that occurred during trading sessions. Pre-open sessions consist of IPO and Reenlisted securities.
A normal trading session at the Indian stock markets commences at 9:15 AM and closes at 3:30 PM. A pre-open Session is a 15 minute trading window which starts at 9:00 am and ends at 9:15 AM. A price band of 20% is applied to all the securities in the pre-open session.
This session is divided into three different slots, namely:
- Order Entry Period (8 minutes):In the first 8 minutes of the call auction session, stock orders are placed by traders. In this window of time, the traders can cancel, or modify their requests as per their desires.
The stoppage of accepting orders is induced by the systems randomly between the 7th and 8th minute.
- Price Discovery and Order Execution (4 minutes): in the next 4 minutes, the prices of stocks are determined and the orders placed are hereby confirmed, leading us to the third window of time, i.e. order matching.
- Order Matching Period (3 minutes): Order matching period is the last phase of the pre-open session, which is the transition time from pre-open session to the regular trading session.
How does it work?
To show you how the pricing at the pre-opensession works, let’s consider the following tables:
- Buying stocks order:
|Buy Order||Buying Price (Rs)||Cumulative|
- Selling order:
|Sell Order||Selling Price (Rs)||Cumulative|
The above tables show various buy and sell orders placed by traders. Table 1 displays a bid for 5 shares for Rs.11, 4 shares at Rs 12 and so on till Rs. 15 for just 1 share.
Table 2 shows the sell rate of 5 shares at Rs. 115, but only Rs 14 for 4 shares going all the way down to Rs 11 for 1 share.
From the above tables, if we were to draw a cumulative demand and supply function curve, it would look like this.
- At Rupees 11, there are 15 buyers and only 1 seller
- At Rupees 12 there are 10 buyers but 3 sellers.
- At Rupees 13, there are 6 buyers and 6 sellers.
- At Rupees 14, there are 3 buyers and 10 sellers
- At Rupees 15, there is a single buyer but 15 sellers.
From the above function demand and supply curve, we can observe that the point that both the curves intersect is the equilibrium price (Rs. 13) of the pre-open session, which can expect the most number of transactions. In case there are two prices wherein the demand and supply curve match, the one with the least imbalance is chosen. If, in case, both the prices are equally imbalanced, then the price which is closest to the last closing price is selected.
Such a prediction made even in just theory helps in easing off some of the price volatility of the market during the opening minutes.
Significance of Pre-Open Session in the Market
- Reduces Price volatility of securities.
- Chances of better price discovery.
- Greater liquidity in the stock market due to intensive and in depth demand supply schedule.
- Pre-open call auctions are known for their enforcing of fairness, especially for non professional traders and small investors. This is because all trades are executed at one price.
- The simultaneous nature of trading ensures there is no front running of customers during placing orders.
- Lower cost of impact.
Most Active Stocks during the Pre-open session
According to the latest stock readings and Indian stock market analysis, we would like to list the top 12 stocks doing extremely well during the pre-open call auction sessions. They are:
- Arihant Super
- Rel Capital
- Lasa Supergerner
- Bharat Fin
- Jindal Steel
The technological advancements of the times have made it very convenient for traders and investors to follow stock market trends and activities even after the close of a trading session. It becomes very profitable to trade even outside the market timings in cases where traders acquire experience and expertise through practice and learning. At Indira, we are dedicated to creating a great learning experience for all our readers through our one stop blog and its articles. You can read more about Initial Public Offering securities traded in the pre-open session in our article “What is an Initial Public Offering?”