Did you know that before 2010, the execution price of the first matched order of a trading day set the tone for the opening price for that trading day? But such a method of opening price-discovery led to high volatility in the market right at the beginning of the day. The solution is the BSE and NSE pre-open market.
This article covers:
- What is the pre-open market?
- Features of pre-open market
- How does the pre-open market work?
- Who should invest during the pre-open market?
- Things to consider as an investor
- Advantages of pre-open market
- Other facts on pre-open market
What is the pre-open market?
The Indian stock market’s regular trading hours are 9:15 am to 3:30 pm. However, in order to arrive at an ideal opening price for the stocks and also manage the volatility in the initial part of the trade session, the NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) introduced an innovative method known as the pre open market.
The pre open market/pre open session exists for 15 minutes, i.e. 9:00 am – 9:15 am before the actual opening bell for regular trades. This session is utilised for order collection and order matching.
Features of pre-open market
- Volatility limitation: It restrains the market from heavy volatility due to significant overnight events or announcements such as mergers and acquisitions, credit-rating downgrades, open offers, delistings, and announcements from companies like earnings reports.
- Uniform price band: All eligible orders for particular shares will be matched on a single uniform market opening price. The price band applicable to the pre-open market is 20% to all eligible securities.
- Collection and execution: Orders get collected during the order entry period, and trade executions occur during the order matching period. During the order matching period, traders can not modify or cancel the order.
- Priority to limit orders: “Limit orders” get priority over “market orders” for execution. The trade confirmations are broadcasted to respective members on their trading platform before starting the stock market.
- Movement of unexecuted trades: In the event of no trades, unexecuted but eligible orders will be moved to the following regular trading session with priority.
How does the pre open market work?
The order collection period is 8 minutes, i.e., 9:00 am – 9:08 am, during which orders can be placed, modified and cancelled. This order entry session will stop between 9:07 am – 9:08 am.
Next, the order matching period begins, i.e., 9:08 am -9:12 am, during which orders are matched at the equilibrium price. It will help set the opening price for the stocks listed in the exchange.
After the order matching period, there is a silent period, i.e. 9:12 am – 9:15 am, to transition from the pre-open market to the regular market. All outstanding orders are moved to the regular market holding the original timestamp.
- Generally, based on the demand and supply mechanism, the equilibrium price is the price at which the maximum volume is executable. The equilibrium price is based on both the limit orders and the market orders. It is considered as the open price for the subsequent continuous trading day.
- Unmatched/unexecuted limit orders and market orders during the pre-open session will be moved to the following trading session at the same price.
Who should invest during the pre open market?
Any individual looking to invest in equity stocks excluding ETFs and mutual funds can be part of the pre-open market.
However, sometimes stockbrokers do not activate this feature in a trading account so that new traders do not participate in the pre-market sessions without the required knowledge.
The investor may need to request their broker to activate the pre-open market trading.
Things to consider as an investor
Segment: You can place orders only on the equity segment. This facility is not available for futures and options trading.
Market direction: The pre-opening session helps investors to find out the price at which the market will open. However, it is not a measure to determine the market’s direction for the rest of the day.
Price band: Orders during the pre-open session can not be placed above 20% of the previous day’s closing price.
Revealed quantity facility: This facility will not be available during the pre-open session. The system will reject an order with the revealed quantity function.
Margin rule: The current upfront margins will continue to be applicable during the pre-open market.
The fee structure: The active/passive transaction fee structure will be levied to pre-opening eligible trades once it gets executed.
Order execution: In the regular stock market, a trade gets executed when buy orders and sell orders match each other in terms of the same price and quantity. Whereas during a pre-opening market, orders get executed at predetermined times aggregately. All buy orders get aggregated into a downward demand slope, and all sell orders get aggregated in an upward supply rise.
Trade orders: The pre-opening market session generally has limited liquidity and lower volume as compared to the regular market hours. This can hugely impact the price a trader ends up getting for their shares. Therefore, it is wise to prefer a limit order if trading outside standard trading hours.
- Market order: It is a trade order executed as per the availing market rates, as the price of the order is not specified for trading.
- Limit order: It is the trade order when the maximum or minimum price is specified for trading at which you are ready to complete the transaction; therefore, execution occurs when the matching order is found.
Stock movement: It is important to note that the movement for most stocks may not occur so high unless there is news. However, blue-chip stocks tend to get traded as early.
Tools utilisation: It is always better to use tools like Stop loss to protect yourself from the downside and improve the chances of successful trades.
Gather adequate information: Most investors avoid trading during the pre-open market session if they have inadequate familiarity with it. You can search for Nifty 50 pre open NSE market and NIFTY pre market to monitor changes in the market on a daily basis.
For updates on extended hours trading results, you can go through the NSE India pre open market webpage. NSE pre open market today, as on 7th July 2021 closed at Rs 15,819.60.
Advantages of pre open market
- Reduced price volatility: The foremost benefit is the reduced price volatility because of multiple matching of orders at the same price.
- Increased liquidity: It increases the liquidity due to the deeper demand-supply schedule. However, you may not find considerable activity in all stocks.
- Reduced market impact: It is the pre-opening session discovered to reduce the market impact.
- Lowered transaction cost: Another benefit is the lower cost of transaction as the trade execution during the pre-opening session is free from the impact cost. Investors can take advantage of NSE or NIFTY pre market at a lower cost.
- Fairer for small investors: It can be a fairer market, especially for small investors, as the uniform price is applicable to all trades.
Other facts on pre open market
At present, the pre-open session is enabled for only Nifty 50 stocks at NSE and Sensex 30 stocks at BSE exchanges. Stock inclusion and exclusion in the Nifty or Sensex indexes will be a part of the pre-open market.
During the Order Collection phase, price, quantity and value are indicative in nature, and final values are displayed after the closing of the Pre-Open Market Order Collection period.
During the Order Entry Period of the pre-open market session, the following information is disseminated to the market that can be useful for the investors:
- Indicative opening price and matchable quantity
- Highest and lowest indicative price
- Total sell quantity
- Indicative value as per the indicative open price of Sensex