Pre-open trading window saves post-Rexit morning blues

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 on Monday as well.

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.

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

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. 

“So, pre-open period could not prevent either the downside opening, or the sharp upside there of, but it sure did snuff out possibly high volatility at open,” he noted. Marketmen said some big domestic institutions could have been pressed into buying to check the losses, as turnover was relatively higher in early morning trade for a Monday.

“Pre-open trading session depicts the emotional reflection of overnight events at the opening of the market. But when the actual trading starts, rationality overtakes emotions and market resumes its original trajectory,” said Jimeet Modi, CEO, SAMCO Securities.

In case of bullish undertone it will go up and down during bearish bias. However, such kind of overnight events do not change the main direction of the market. At best, such news gets discounted and assumes the colour of respective bullish or bearish phase of the market, Modi added.

There have been concerns about a sharp plunge in the stock and rupee valuations after Rajan’s exit announcement over the weekend. “Eventually fundamentals play out. Pre-open trading session is more of sentimental bets which lack depth and full participation by market participants. Going by historical weight of evidence on normal days it is much more authentic indicator of market opening levels rather on days like today where it is more of 50-50 probability,” said Dharmesh Kant, Head, Retail Research, Motilal Oswal Securities.

“It is neither Rexit or Brexit but RainExit that should be worrying investors more as nearly 60 per cent of Indians still depend on agriculture and allied activities and with two successive monsoon failures the need for a normal monsoon to kick-start rural demand cannot be underestimated,” said Ajay Bodke, CEO & Chief Portfolio Manager - PMS, Prabhudas Lilladher.