- Wealth PMS (50L+)
On the NSE, there will be a pre-open auction session from 9:00 to 9:15 after which regular trading will happen.
Why a pre-open auction?
The “open” price has been very unreliable, basically because it’s the first price traded. Many brokers allow their clients to place orders overnight and release those orders into the exchange the first thing in the morning. This can cause serious imbalances because many customers, sometimes from lack of knowledge and other times from misinformation from the brokers, place “At Market” orders before the open, which means the orders will be executed at whatever price there is someone on the other side. Obviously this can be used to manipulate the price – a counter for a “market order” can be a proprietary arm of the broker, who knows about the market orders, placing crazy limit orders on the other side. Look at my post on Ranbaxy spiking to 660 at the open in 2008.
A lot of pre-open orders are also placed based on overnight news – any news after 3:30 pm can only be accomodated in the stock the next morning, but people tend to panic and place market sell or buy orders with their brokers.
So what happens?
If there is no price discovery possible because of lack of orders, there is no matching and the regular trading happens at 9:15.
In their infinite wisdom, the NSE has decided that this should apply only to Sensex and Nifty stocks. This is unfortunate, because open price manipulation happens largely in second rung stocks. The rest of the stocks won’t trade at all till 9:15.
Derivative markets will only open at 9:15.
How does it affect traders?
Because of the massive volume at the start, day traders would work into the 9AM start. Some of that volatility will be tempered by the open auction. For derivatives traders this just means a later start. For arbitrageurs it’s a better mechanism to work the day, but they do miss out on on opportunities created by the open. This is not great for prop-shops or prop-arms of large brokerages, but then this was waiting to happen anyhow.
What’s also interesting is that open-circuits are unlikely to happen with adverse trades. That is, if the open causes a exchange-wide circuit, it will happen before regular trading. Remember, we have had opening-circuit hits three times in the last three years – down in 2007 October (On SEBI banning p-notes), lower circuit in 2008 Jan (on the meltdown), upper circuit in 2009 (great election results).
To me, not much of a difference – I don’t trade before 9:30 AM anyhow.