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Know What is Pre-Market Trading & How it Works in Share Market

Most of us are aware that trading takes place on the stock exchange between 9.15am and 3.30pm. But what if we told you that it is only partially correct. Some trading (though low in volume) also takes place during the extended trading hour periods. Read on to know about more about this additional trading window and its significance.

What is Pre-Market Trading

Pre-market Trading is a global phenomenon and refers to trading that takes place before the usual trading hours. The usual trading hours for Indian stock markets is 9:15 am to 3:30 pm. Pre-open market stock trading is a special trading window of 15 minutes prior to the start of the working hours for the stock markets. Hence, the time frame between 9:00 am and 9:15 am is considered as the pre-open market session. This feature was first introduced by NSE and BSE in October 2010.

The objective behind a pre-market trading

It was observed that there was tremendous volatility in the first couple of minutes of trading hours. The core objective behind having a pre-market trading session is to stabilise the market especially when heavy volatility is expected due to some overnight major events or corporate announcements. These could be election results, reforms or new economic policies, declaration of mergers and acquisitions, delisting of shares, open offers, change (especially downgrading) in credit ratings, debt-restructuring, market rumours etc.

The additional 15 minutes allows the stock markets to arrive at the right premarket stock price and not get carried away by external events or announcements. In India, premarket future or options trading is not permitted.

Pre-market Trading Session – Breakdown of the 15 minutes

The premarket trading period can be further bifurcated into three slots:

Order Entry or Collection
The Order Entry session starts at 9:00 am and lasts for eight minutes. The following activities are undertaken during this timeframe

  • Placing of orders for purchase or selling of stocks
  • Changes or modification in orders
  • Cancellation of orders

After 9:08am (i.e. completion of order entry session), orders are not accepted by the stock markets


Order Match
The Order Matching session starts at 9:08am and continues for the next four minutes. The following activities are undertaken during this timeframe

  • Confirmation of orders placed during the Order Entry session
  • Order Matching
  • Calculation of stock opening price for the regular session that starts at 9:15am

During the Order Match session, one cannot buy, modify, cancel or sell their orders. Limit orders (i.e. order quantity and price is specified) are given priority over the market orders (order quantity and price are not specified) during the execution time.


Buffer Time
The last three minutes of the premarket trading session (i.e. 9:12 am to 9:15 am) is considered as buffer time. This period is used to ensure a seamless transition to regular trading hours. Any abnormalities from the previous two slots are addressed during this time.

 

Calculation of Opening price during the pre-market stock trading session

The opening price of the stock during this session is determined during the second phase i.e. Order Match session. It is done with the help of a specific methodology. This calculation method is referred to as the call auction methodology or the equilibrium price.

The stock price which corresponds to the maximum quantity of tradable shares is known as the equilibrium price. It is a factor of demand and supply. The orders placed during the first eight minutes are matched at the equilibrium price and then traded accordingly.

Some scenarios:

  • If the highest tradable quantity corresponds to two different stock prices, then the stock price with the lower unmatched orders is taken as the equilibrium price. For example:

 

Stock Price

Order (Buy)

Order (Sell)

Demand

Supply

Max Tradable Quantity Size

Unmatched Orders (Demand minus supply)

105

1275

1160

25000

20000

20000

5000

99

2000

8000

20000

30000

20000

-10000

 

Though the maximum tradable quantity is same in both the cases, the equilibrium price will be considered as 105 as it has a minimum unmatched order size

  • If the values of the highest tradable quantity and unmatched orders are same or equidistant, but they correspond to two different stock price, then the above methodology cannot be applied. In this case, the equilibrium price is taken as the stock price which is closer in value to the closing price of the previous day. For example,

Stock Price

Order (Buy)

Order (Sell)

Demand

Supply

Max Tradable Quantity Size

Unmatched Orders (Demand minus supply)

105

1275

1160

25000

20000

20000

5000

99

2000

8000

20000

25000

20000

-5000

Assuming the closing price on the previous day was Rs. 110, then the equilibrium price in the above example will be Rs. 105.

 

What about orders that remain unmatched or are not traded in the pre-open session?

Orders that are not traded or remain unmatched are carried forward to the general trading session. The opening price of these orders is determined in the following manner:

  • Limit Orders i.e. orders wherein the price and quantity are already specified are carried forward at the same mentioned price
  • Market Orders i.e. orders wherein the price and quantity are not specified are carried forward at:
    • If the opening price was ascertained during the pre-open trading session but order not traded, then at the determined price
    • If the opening price was not discovered, then they are carried forward at the previous day’s closing price

 

Stock Markets tend to be overwhelming for many investors. The concept of premarket trading can further compound the complexity level. However, as an investor, you should always remember that help is just around the corner. Professional experts like IndiaNivesh can help to simplify and demystify the entire process. The team at IndiaNivesh keeps a close eye on this Pre-market session to comprehend the mood and strength of the stock market. They track the pre-market stock prices and take the best decisions for your portfolio basis the market sentiments. Moreover, since they offer a wide range of services (broking, mutual funds, institutional equities, private equity, strategic investments, corporate advisory, etc.) they have a holistic view of the market and the economy. Their expert opinion can help you to amp up your investment game.

You can read more about their offerings, vision and accomplishments on their website https://www.indianivesh.in/




Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."