Guys, while reading one of my favorite bloger's old posts, I got a very important information for which I was searching from last one year. I was wondering what is exact procedure & how market opens more or less of its previous close. I know traders put orders, depending upon that it will vary, but I wanted know exact procedure. Here is the some info on that, which I got while reading Ajay Shah's blog...
What's a call auction?
Call auctions are like the pre-opening phase at BSE or NSE. Here orders are put into the computer, but trades don't take place immediately. The computer constantly recalculates the "equilibrium price" where the maximum number of shares could be transacted. This process goes on for half an hour or so, and at the end of this the computer says DONE, and all the trades take place. A key feature of the call auction is that there is no bid-ask spread, i.e. all the trades take place at the same price.
Earlier I said that the ELOB market works very well "under normal conditions" with lots of traders and a healthy order flow. Call auctions have been used with a good deal of success, worldwide, in abnormal conditions. For example, NYSE opens every day with a call auction, and whenever circuit breakers are hit, the market drops out of continuous trading into a call auction.
What is wrong with what the other exchanges are trying?
The dominant form of market in India today is the "electronic limit order book (ELOB) market", or the order-matching system that is seen on NSE or BOLT. This is an extremely successful form of market organisation worldwide, and the fact that both BSE and NSE in India are using this idea has made India's markets very advanced by world standards.
The ELOB market works very well for problems like trading Reliance, or futures on Nifty, etc., where you can expect a huge number of people from all over the country to be interested in trading the same thing. The trouble with smallcap stocks is that there are just too few people who take interest in each of the stocks. This makes life difficult when using the ELOB market.
In this sense, there is nothing "wrong" with what the other exchanges are trying. It's just that their focus is on doing the best thing possible for the biggest trading volumes to be found in the country, i.e. problems like trading Reliance or SBI or Nifty futures. It is possible that smallcap stocks require a different approach.
What should the real role for OTCEI be?
Internationally, when we say "Over The Counter", we don't mean "Exchange". The OTC market worldwide is mainly about customised, bilateral deals that are done between big players in investment finance and their customers. There is a huge "OTC derivatives" industry, which consists of trades in options or futures or more complex contracts, between two people, without any exchange being in the picture. In this sense, it is a little odd to say "OTC" and "Exchange" in the same sentence.
In India, we can think of the role of OTC as being that of trying to create liquidity for relatively illiquid stocks. I think that is the most useful way to define the objective of OTCEI: to find techniques of making smallcap stocks more liquid than would be the case on the other major exchanges.
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