Pre-open Session . How is the equilibrium price determined ?

If you are a trader you must have seen that there is a pre-open session from 9 am to 9:15 am for both the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). It is basically the period of trading activity that takes place just before the regular stock market session. Traders keep a close eye on this Pre-market session to guess the strength and mood of the market while looking forward to market opening. Let us try to understand how things work during these 15 minutes.

At the outset let me tell you that you can place two types of orders in the stock market – market order and limit order (refer to the following graph).

The 15 minutes of pre-open session consists of 3 time slots

Now that we know the activities carried during these 3 time slots belonging to the pre-market session, let us take a look at how the equilibrium price determination or the call-auction session functions.

Case I

Say for example, previous day closing price of Stock A is Rs. 200. The following table gives the price and quantity figures during the pre-open session

Share Price Order Book Demand & Supply Quantity Maximum Tradable Quantity Unmatched Orders
BUY SELL Demand Supply
202 1000 985 3400 985 985 2415
204 1275 1161 13600 22000 22000 -8400
205 5000 4300 10000 10500 1000 -500
207 4000 7500 4000 6250 4000 -2250
199 2000 10000 27000 37000 27000 -10000

Share price Rs.199 corresponds to the highest tradable quantity of 27000 and hence will be considered as the equilibrium or call auction price.

Case II

Let’s have a look at another possible scenario.

Share Price Order Book Demand & Supply Quantity Maximum Tradable Quantity Unmatched Orders
BUY SELL Demand Supply
202 1000 985 3400 985 985 2415
204 1275 1161 13600 22000 22000 -8400
205 5000 4300 27000 10500 27000 16500
207 4000 7500 4000 6250 4000 -2250
199 2000 10000 27000 37000 27000 -10000

The above table shows maximum tradable quantity corresponding to two prices.

In that case minimum unmatched orders quantity corresponds to Rs.199 (10,000) and not Rs. 205 (16,500). Hence in this scenario share price of Rs.199 will be taken to be the equilibrium price or co-auction price.

Case III

A further possibility is that both maximum tradable quantities and unmatched orders are the same as the highlighted rows in the following table show.

Share Price Order Book Demand & Supply Quantity Maximum Tradable Quantity Unmatched Orders
BUY SELL Demand Supply
202 1000 985 3400 985 985 2415
204 1275 1161 13600 22000 22000 -8400
205 5000 4300 37000 27000 27000 10000
207 4000 7500 4000 6250 4000 -2250
199 2000 10000 27000 37000 27000 -10000

In this case, the price closer to the previous day’s closing price of Rs.200 will be taken to be the equilibrium price. Here it is Rs.199.

Case IV

But if both the prices are equidistant as is shown by the following table.

Share Price Order Book Demand & Supply Quantity Maximum Tradable Quantity Unmatched Orders
BUY SELL Demand Supply
202 1000 985 3400 985 985 2415
204 1275 1161 13600 22000 22000 -8400
201 5000 4300 37000 27000 27000 10000
207 4000 7500 4000 6250 4000 -2250
199 2000 10000 27000 37000 27000 -10000

In this case the previous day’s closing price will be the equilibrium or call-auction price.

Remember

  • Limit orders will get precedence over market orders during execution.
  • All market orders will be executed at the determined equilibrium price or call-auction price.
  • All limit orders that are not executed will be moved to the regular trading session.
  • A uniform 20% price band is applicable to all eligible stocks during these 15 minutes

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