What is a pre-open market session in the stock market?

Introduction

Stock markets have fixed trading hours. Share prices react to market impact-oriented business, economic or political news during that period. However, there are days when announcements are made after trading hours. Investors cannot act on that information, as there is no after-hours market in India. They must trade the next day.

At times, developments have extreme interpretations. Different types of investors act in different directions. A few investors predict that the stock price will rise, while others expect a fall. Sometimes, market participants are aware of the direction in which the share price will move. As a result, there is high volatility in stock prices. There is a chance that it could make reacting to news difficult for small investors. 

A pre-market opening session was introduced to avoid investor losses and ensure an orderly price discovery in the most volatile times. With indications and prompts from the global market, the Indian stock market started a pre-open market session in October 2010.

What is a pre-market open session?

The regular trading hours of the cash segment in the stock market start from 9:15 am onwards. The pre-open session is for 15 minutes, from 9:00 am to 9:15 am. It is the same for BSE and NSE.

The pre-open session consists of three segments - an order entry period, an order matching period, and a buffer session. The price band applicable is the same as the normal market.

Order collection session

The order collection session lasts for 8 minutes. During this sub-session, the tasks undertaken include order placement to buy and sell stocks and modification and cancellation of orders. Orders are not accepted after these 8 minutes end.

Order matching period

The order matching period lasts for 4 minutes, from 9:08 am to 9:12 am. These four minutes are spent on order confirmation and order matching. After matching the orders, the opening price for the day is calculated. When the session is ongoing, market participants aren’t permitted to buy, sell, cancel, or modify their orders.

Buffer session

The last 3 minutes between 9:12 am and 9:15 am are for a buffer session. Any abnormalities, if existing, are ironed out. The session facilitates the transition from the pre-open market to the normal market session.

How is the opening price of a stock fixed?

When the pre-market opening session is ongoing, a call auction takes all orders to identify an equilibrium price. This equilibrium price is the opening price of a stock. It is the price that receives the highest number of orders for buying or selling the share. In case two or more equilibrium prices are arrived at, the price with the lowest unmatched order quantity is taken as the equilibrium price. Furthermore, if there is more than one price with the same unmatched quantity, the price closest to the preceding day’s closing price is regarded as the equilibrium price.

Sometimes, there is no equilibrium price discovery in the pre-open session. If that happens, all orders are transferred to the normal market at the closing price of the previous day.

Is trading permitted in the pre-open market session?

There are no restrictions for trading in the pre-opening session. But, due to high volatility, some brokers can make the feature inaccessible for new traders.

What is a post-closing session?

The stock market closing time is 3:30 pm. The post-market session starts at 3:40 pm and ends at 4:00 pm. Like pre-market orders, the post-market session also allows orders only for equity trading.

During this period, market participants can buy/sell orders in equity at the market price. But remember, if you place an order during the post-closing session, it will be placed on the exchange at the closing price.

Final word

Investors can benefit from the pre-market opening session by understanding how the previous day’s price affects trading. But, it is first vital to learn how to pick stocks from the pre-open market. You can request your broker to provide access to the pre-open session feature for you once you are ready to participate in it.