The call auction is an alternative price-discovery mechanism that is being increasingly considered for trading on exchanges. Exchanges use call auctions to improve price discovery where continuous trading have not delivered desirable market outcomes. Call auctions are used to discover prices at market open, market close, as a trading mechanism for illiquid stocks, as well as during periods of information shocks. However, their role is relatively small at exchanges today, compared to either continuous trading or dealer-market/specialist trading system. Part of the reason is that call auctions can improve market outcomes only when it can attract sufficient order now to create a demand-supply schedule, well populated with information rich orders. This has proved difficult. Furthermore, the auction price-discovery process is vulnerable to manipulation, since it is less costly to place orders with misleading price information in the auction compared to placing orders on the continuous market.Thus, call auctions need the right design to ensure optimal auction participation. Key parameters that the design depends upon are: the period of the auction, the flexibility of the auction to accommodate all kinds of orders that contribute directly to price discovery or to maximising traded volumes, and how the auction price is calculated.
* Susan Thomas, Call auctions: A solution to some difficulties in Indian finance, WP-2010-006, Indira Gandhi Institute of Development Research, Mumbai, June 2010