Market experts believe that the introduction of pre-open session assumes special significance, especially, in situations when there is any major event or announcement comes overnight before market opens.
Such special events may be such as merger and acquisition announcements, open offers, delistings, debt-restructurings, credit-rating downgrades or any rumours regarding any of such events, they said. "On a normal day with no major event before 9:00 AM, this pre-open session may appear to be a non-event and a routine exercise. However, on a day when there is any major outcome before the market hours this mechanism assumes special significance," SMC Global Securities Strategist Jagannadham Thunuguntla said.
Capital market regulator Securities and Exchange Board of India had given its green signal for the introduction of pre-open session call auction on the bourses in July this year. In a call auction practice, participants indicate their willingness to buy or sell units of a security by placing an order for a number of units at the prevailing price before the opening of trade.
The mechanism, known as 'pre-open session call auction', will last for a duration of 15 minutes (from 9:00-9:15 am). The introduction of pre-open session with a call auction mechanism is expected to reduce the quantum of volatility, typically visible in the first few minutes of trade, analysts said.
"It is very good attempt by SEBI to introduce pre-open session in Indian markets, as it ensures the integration with the international markets," Thunuguntla added.
Experts believe this mechanism will help retail as well as institutional investors.
"This system will reduce price volatility due to multiple matching of orders at a single price, better price discovery and also dilute market impact," a senior official at the BSE explained. "Another advantage of this mechanism is a fairer market especially for small, non professional investors because all trades get executed at the same price," he added.
According to the exchange official, a uniform price band of 20 per cent will be applicable to all eligible securities during the pre-open session. In the first 15 minutes, investors can place orders for eight minutes on the basis of which the exchanges will determine the rates at which trading will happen. Initially the call auction session will be applicable for those stocks, which are the part of Sensex and Nifty.
Sensex, the benchmark index of BSE, comprises of 30 blue-chip stocks, while Nifty -- the NSE barometer-- lists 50 scrips.