Please elaborate.
Hello,
In the past, when there was no pre-open market, there was a high degree of volatility during the first few minutes of trade in an attempt to factor in overnight news which might affect the price of a stock. This would often result in spikes during market open and made it certainly difficult to execute orders at desired prices.
The price at which the first trade was executed in a scrip was considered the Opening price. This was not necessarily a fair Opening price as it would rarely reflect the overnight factors that should determine it.
To eliminate this volatility and to determine a fair Opening price,
A Pre-Open market was installed between 9am and 9.15am to determine the Opening price(OP) or the Equilibrium Price(EP).
In this Pre-open market, the first 8 minutes are used for order collection, modification, cancellation. The next 4 minutes are used for order matching and trade confirmation. The last 3 minutes is a buffer/cooling/transition period from Pre-Open to regular market.
During the first 8 minutes of Pre-Open, i.e. from 9am to 9.08am, various bids and offers are made in a scrip at different prices and at different quantities.
The EP/OP in a scrip is then calculated as the price at which maximum buy and sell quantities can be matched. Both limit orders and market orders are used for calculating the EP/OP.
Since the Bid-Ask prices and quantities keep fluctuating during the first 8 minutes, the Nifty index value also fluctuates from 9am to 9.08am. This is because the Bid-Ask prices of scrips thats constitute the Nifty index also fluctuate during this time.
The information we receive in the Pre-open other than EP/OP are -
Market Depth
Total buy and sell quantity for a security
Indicative Nifty index value
% change in OP to previous day’s close price.
To know more about the different cases in how EP/OP is calculated, please refer this NSE Circular.
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