Rexit worries: pre-open call window saves markets from volatility

The 15-minute pre-open call auction is helpfull in containing excessive volatality, which was expected today.

Updated: June 20, 2016 7:29 pm

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It was the 15-minute ‘pre-open trading window’ that saved morning blues for the stock market when it opened after RBI Governor Raghuram Rajan’s surprise weekend announcement saying no to a second term.

First introduced in 2010, pre-open call auction was extended to all shares in 2013 and this 15-minute window at the start of a trading session comes handy in containing excessive volatility, which was expected following the announcement of RBI Governor Raghuram Rajan not pursuing a second term in office.

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Typically, in a call auction the buyers set a maximum price at which the shares can be bought while the sellers keep a minimum price for selling the scrips — without any trade actually being executed in this period. All orders need to be checked for margin sufficiency at order level in this period.

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All shares trade within a band during this period, conducted between 9 am and 9.15 am, after which the normal trading session begins.

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The first 8 minutes allow order entry, order modification and order cancellation, while the next 4 minutes are for order matching and trade confirmation, and the remaining 3-minute time is buffer period to facilitate the transition from pre-open session to the normal market.

In today’s pre-open trade, the stock market benchmark index Sensex touched a low of 26,438 points, down nearly 200 points from its previous close, but early morning buying orders helped limit the opening loss at 178 points.

Heavy buying thereafter lifted the index higher by 241.01 points to 26,866.92 at the end of the day.

Experts said that pre-open sessions are very useful in containing volatility in stocks, especially due to the overnight and weekend developments.

Marketmen also said it would have been difficult to check volatility had Rajan’s announcement come during trading hours.

“A good section of investors may have been expecting volatility or extended downtrend through the day, especially with the pre-open trade signalling a 200 points downside opening of BSE benchmark,” said Anand James, Chief Market Strategist, Geojit BNP Paribas.

According to James, there are two reasons why both volatility as well as extended downtrend were on check earlier in the day.

“Firstly, Brexit fears had eased during the weekend and Asian markets had already run up buoyed by such reversal in sentiment. Secondly, this being the first trading after the RBI Governor’s announcement, the market has had only so much time to debate the ramifications of Rexit.

“Hence, beyond the initial negative sentiment, that was anyway expected of the sudden announcement, there was not much momentum to push ahead. Infact this is where the pre-open trading session helped, as the volatility that may have followed from the negative convictions was evened out during the first eight minutes of the pre-open session and positivity prevailed,” James added.

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