The Sensex is three times more volatile in the first 15 minutes as compared to the remaining part of the trading session.
According to Bloomberg data, around 9-9.15 am, the Sensex moves on an average by 0.17% every 15-20 seconds, as compared to 0.06% during the rest of the trading session.
In fact, every day it is usual to find wild gyrations in Sensex values during the initial trading session. From a 100 point gain, it is not uncommon to find Sensex slipping into the red over the next few seconds. To do away with such fluctuations during the initial trading period, a call auction mechanism is being introduced on the NSE and BSE from October 18. This is expected to attract more institutional participation during the opening session and aid in better price discovery.
Currently, retail investors dominate the markets opening session whose bids are typically in smaller lots at different price levels, leading to wild fluctuations in prices. This process often leads to significant gap up or gap down opening of equity indices and individual stocks. ?Since institutional orders are bigger than retail orders, they really don’t feel comfortable with the current process because of the smaller order book size and higher impact cost,? said Sayee Srinivasan, head ? product strategy at the Bombay Stock Exchange (BSE). Srinivasan added that the mechanism of call auction will add depth to the order book by aggregating all trade orders during the pre opening session. ?This will automatically prompt institutional investors to participate as it will help them to execute large orders at one go,? he said.
This price discovery system is already prevalent in major overseas stock exchanges like Nasdaq, NYSE, LSE, Duetsche Bourse, Hong Kong and the Australian Stock Exchange. Call auction mechanism is similar to that of a book-building system in which all outstanding trade orders are matched to arrive at a single price. To begin with, call auction will be held for only those stocks which are part of the Nifty and Sensex from 9 am to 9.15 am, while trading for other stocks will open from 9.15. Under this method, order entry, order modification and order cancellation are done between 9 am to 9.08 am. After eight minutes of market opening, there could be no modification or further addition of orders. Then for the next four minutes (9.08 am to 9.12 am ) orders are matched and confirmed while the period between 9.12 and 9.15 is a buffer period to facilitate smoother transition from pre-open session to the normal trading hours.
Jagannadham Thunuguntla, strategist and head of research at SMC Global Securities, feels that that the mechanism will give equal chance for all the market participants to sense what?s the reaction of the market to an event that happened overnight. ?They can see how the book is getting built, with details such as indicative buy price, sell price, cumulative buy quantity and cumulative sell quantity. They will also get to see what?s the indicative equilibrium price (that is, the price at which maximum quantity of trades can get executed) for such stock,? he said.