Introduction
Metropolitan Stock Exchange of India Limited (MSE) conducts a Pre-Open Session using the Call Auction mechanism for price discovery before the commencement of normal market trading. Orders are accumulated during the order collection period and matched at a single equilibrium price based on demand and supply. The equilibrium price discovered becomes the opening price of the security.
The market opening price and quantity traded are derived based on aggregated supply and demand for the underlying. The orders that trade and the price and quantity at which they trade, are set by multilateral matching, rather than by the sequence of bilateral matching used to determine trades in a continuous market.
The concept of order batching which is core to the call auction mechanism can be understood with the help of an example. We look at a simple order book which shows buy and sell quantities at various price points.
Sample order book showing buy and sell quantities at various price points| Buy Orders | Buy Price | Sell Price | Sell Orders |
|---|
| 1 | 54 | 50 | 2 |
| 1 | 53 | 51 | 1 |
| 2 | 52 | 52 | 1 |
| 2 | 51 | 53 | 2 |
| 3 | 50 | 54 | 1 |
The graphs below display how buy and sell orders are batched together to bring about an equilibrium quantity and price. The vertical axis shows the price and the horizontal axis shows the quantity.
Demand Curve
Figure 1: Cumulation of Buy Orders. All the buy orders are cumulated to form a downward sloping demand function. The cumulation happens from the highest to the lowest price. The highest buy order is at price 54 at which there is an order of quantity 1. At price 53, an additional order of quantity 1 has been placed. This makes the cumulative quantity 2 orders at price 53. Similarly, at price points 52, 51 and 50 the cumulative quantity is 4, 6 and 9 orders respectively. Thus the cumulative buy quantity increases as the price decreases.
Supply Curve
Figure 2: Cumulation of Sell Orders. Similar to the cumulation for the buy orders, all the sell orders are cumulated to form an upward sloping supply function. The sell orders are cumulated from the lowest to the highest price. The lowest sell order of quantity 1 is at a price of 50. At price 51 there are 2, making the cumulative quantity 3 orders. Similarly, at price points 52, 53, 54 the cumulative sell quantity will be 4, 6 and 7 orders respectively. Thus the cumulative sell quantity increases as the sell price increases.
