Tuesday, October 12, 2010

Introduction of Pre Opening Session on NSE

Further to my blog on Pre-opening session and SEBI guidelines,

NSE came out with guidelines on Pre opening session.
There will be Pre - Opening session on National Stock Exchange of India Limited (NSE) from 18th Oct, 2010 for determination of credible opening price.

The Key takeaways and Precautions of this circulars are as follows :

a) Pre Opening session is meant to discover opening prices thereby reducing volatility in price at the open of the market. Initially only only Nifty and Sensex stocks are included in Pre opening session, but eventually Pre opening session will be there for all stocks, when the systems is stabilised and running without hindrance or improper price computation (Pre Opening session was there in India in 1999, but It was discontinued after instances of flaws in price computation algorithm)

The Pre Opening Session is there only in Cash Market and there will not be a pre opening session in Derivatives market. 

b) The Pre opening session will start at 9.00 am and will close between 9.07am  to 9.08 am randomly to avoid and foul play at last moment. The normal Cash market will start at 9.15 am after getting confirmation of trades in pre opening session. There is no clarity on change in timing of derivatives market, but I guess F & O market will also start from 9.15 am.

c) There will be a separate book for pre opening session in market. It will be called as PO, So if you wanna trade in Pre opening session you will have to trade in PO book (EQ : Normal Equity , BE : Trade to Trade Stock) and than during normal market trading will take place in EQ book.
All pending orders which are not matched in Pre opening session will be automatically transferred in normal market. The un executed market orders will be transferred as limit orders at opening price.

d)  Order Matching Logic. : The order matching logic in pre opening session is as follows, The priority will be given to limit orders, and than the market orders (It is reverse of what was there in earlier Pre opening session). First all limit orders will be taken or price computation and traded, if there is any unmatched quantity , market order will be considered on both sides and then market orders will be matched with market orders at equilibrium price  (Opening price)

My sincere suggestion, Try to put limit orders for better execution.

e) The opening price will be the equilibrium price at which the maximum quantity of trades can take place. If there are 2 equilibrium price in computation, than the price which is closer to closing price will be taken as opening price. 

In case of Only market orders, the previous day closing price will be takes as opening price and if there are no trades in pre opening session than first trade in normal market will be taken as opening price.

f) All un-executed orders will be transferred from pre opening book to Normal market, limit orders will be limit orders and pending market orders will be limit orders at opening price or previous days closing price, what ever the case may be. 

All pending order will have price / priority based on pre opening session time stamp.

g) The Risk management structure will be same as normal market.

It is a good move by SEBI, in reducing market micro structure impact in price discovery process.

But there are some unresolved issues , which I am sure will be resolved on later date, 

i) What will be the opening time for Derivative market segment ? 9.00 am or 9.15 am. ?

ii) There will be impact on price discovery process and there are higher volumes on Derivatives market and market will have to wait for opening session to be over and then only position on Derivative market can be cleared after seeing the opening price on Cash segment. But academically it is found that there  exist lead - Lag relationship between derivatives market and Cash segment and Derivatives market takes the lead and Cash Segment lags behind.

In such situation there lies a probability that there will be a opening price in Cash segment, but Derivatives market may show a different price (In terms of Percentage change from closing price after considering cost of carry for n days). In such case Cash price will immediately drift from opening price to price discovered in Derivatives market. (Only time will say about this behaviour) 

iii) Market orders are meant for prompt execution, whereas it carries a disadvantage in pre opening session, In fact we cannot term it as a way to get cut-off because you are not assured of a trade at opening price. 

It may be advisable for SEBI to disallow market orders in pre opening session as they have disallowed disclosed quantities.

I will update to BSE process of Pre Opening session , after BSE come out with the guidelines.

I welcome your critical comments and suggestion.

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