On Monday, exchanges go live with a call-auction mechanism for BSE Sensex and NSE Nifty stocks. Orders will be executed at 9.15 am after initial order matching, while the markets will function as usual for other stocks.
Markets regulator Sebi intends to subsequently enhance the scope of the auction system by including all liquid stocks. According to market participants, the new framework will go a long way towards curbing initial volatility from overnight news developments.
In simple terms, a call auction refers to a mechanism wherein buy and sell orders on selected stocks (initially, only Sensex and Nifty constituents) are collected over a fixed period of time and processed. The price at which the highest number of orders is executed is chosen. In other words, the buy or sell orders are not executed immediately.
According to a Sebi circular issued in July, the auction session will last 15 minutes, between 9 am and 9.15 am. The first eight minutes will be reserved for order entry, modification and cancellation. The next four minutes will be set aside for order matching and trade confirmation. The remaining three minutes will be to facilitate the transition from call auction to normal open session.
A call auction is different from the existing system of continuous order matching used by domestic bourses. At present, a trade is executed if a buyer and seller agree to a price on an anonymous limit order book. Market participants have welcomed Sebi move, saying the new structure would enhance the functioning of the market and help avoid knee-jerk reactions.
| TEMPERING MOVE |
| * Call-auction session for Sensex & Nifty shares to last 15 mins from 9-9.15 am |
| * Orders for this session not executed directly, but will go to a common pool |
| * Price for maximum orders matched to be the equilibrium price for each share |
| * Orders priced other than at equilibrium will be shifted to the normal segment |
“Call auction can improve the functioning of the market on such issues as market opening, market closing, extreme news events and potentially for illiquid securities, including bonds,” said Susan Thomas of Indira Gandhi Institute of Development Research, in a research paper.
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“They can usefully replace some existing market rules like circuit breakers. At the same time, there are many subtle elements in making a call auction market work, which require care in design,” she explained.
ICICI Direct, in a note to clients on Saturday, said the new mechanism would “smoothen volatility in stock prices due to overnight developments, if any”. It will also help investors achieve better price discovery, it added.
Sebi will review the process after three months before deciding on enhancing the scope of the call-auction mechanism.