Question

What are the different trading phases in the capital market system and how is the opening price determined during the pre-open session?

Hint:

To calculate cumulative demand and supply during a call auction, remember that buyers at a higher price (e.g., ₹106) are also willing to buy at lower prices (e.g., ₹105). Thus, Cumulative Demand is summed from the highest price downwards, while Cumulative Supply is summed from the lowest price upwards.

Answer 1

Step 1: Breakdown of the Capital Market Trading Phases:
The daily trading schedule on the National Stock Exchange (NSE) is divided into three distinct operational phases:
• Pre-open Session (09:00 AM to 09:15 AM):
• Order Entry & Modification (09:00 AM to 09:08 AM): Users can place, modify, or cancel limit and market orders.
• Order Matching & Price Discovery (09:08 AM to 09:12 AM): The matching engine runs an order-matching algorithm to determine the opening price. No new orders can be entered.
• Buffer Period (09:12 AM to 09:15 AM): A transition phase to move unmatched orders to the regular session.
• Regular Trading Session (09:15 AM to 03:30 PM): The continuous trading phase where buy and sell orders are matched in real-time based on price-time priority.
• Post-Closing Session (03:40 PM to 04:00 PM): Allows users to place buy or sell orders at the discovered closing price of the day.

Step 2: The Equilibrium Price Discovery Algorithm:
During the pre-open session, the opening price is determined using a single-price Call Auction mechanism. The system calculates an Equilibrium Price based on the following rules:
• Rule 1 (Maximum Executable Volume): The equilibrium price is set at the level where the maximum cumulative volume of buy and sell orders can be matched.
• Rule 2 (Minimum Imbalance): If multiple price points yield the same maximum volume, the system selects the price that results in the minimum unmatched order quantity (the lowest order surplus/imbalance).
• Rule 3 (Closest to Close): If multiple prices still match, the system selects the price closest to the previous day's closing price.

Step 3: Concrete Mathematical Example:
Let us construct a cumulative demand and supply schedule to see how the system calculates the equilibrium price:

Analysis: At ₹105, the cumulative buy orders (demand) of 27,500 can be matched with a portion of the 36,300 sell orders. This yields the highest executable volume of 27,500 shares. Consequently, ₹105 is discovered as the equilibrium opening price.