You’ve heard the saying, “The early bird catching worms.” The pre-open market is exactly that—a period of trading that occurs before the official share market opens.
In the Indian share market, where the traditional trading session runs from 9:15 AM to 3:30 PM, the pre-open market session typically takes place from 9:00 AM to 9:15 AM. This brief period is designed to facilitate the smooth opening of trading by determining the opening prices of stocks and ensuring orderly market conditions.
The pre-open session in the share market plays a crucial role in reducing volatility by providing a structured process for order accumulation, price discovery and market stabilisation before regular trading hours.
Key Functions
1. Order Accumulation
During the pre-open market session, orders are collected and aggregated from various market participants. This accumulation of orders helps form a comprehensive view of market demand and supply which facilitates a more balanced and informed opening price. By accumulating orders in a controlled environment, the pre-open market session helps prevent erratic price swings that could occur if trading begins abruptly.
2. Price Discovery
The session includes a price discovery mechanism where buy and sell orders are matched to determine the opening price of stocks. This process helps establish an equilibrium price based on the collective input from all market participants. By determining an opening price that reflects overall market sentiment, the pre-open market session reduces the likelihood of extreme price movements when the market officially opens.
3. Controlled Transition
The pre-open session provides a structured transition from the pre-market phase to regular trading hours. This structured approach helps in smoothing out any potential disparities between the closing prices of the previous trading day and the opening prices of the current day. The buffer period between the pre-open session and regular trading allows adjustments and corrections, contributing to a more orderly market opening.
4. Mitigation of Panic Reactions
By implementing a systematic process for order entry and matching, the pre-open session helps mitigate panic reactions that can occur with sudden news or events. It reduces the chances of sharp, knee-jerk reactions by providing a period for the market to absorb and process information before trading resumes.
5. Transparency and Fairness
The session enhances market transparency by ensuring that all participants have access to the same price discovery process. This transparency helps promote fairness and reduces the potential for manipulation or unfair price movements, contributing to overall market stability.
There is a lot more to learn about stock market timings. Learn here.
Breakdown of the Market Session – Pre-Open and Regular
1. Order Entry Session (9:00 AM – 9:08 AM)
- Purpose: This session is for entering orders into the system. Investors can place buy and sell orders during this time. These orders are accumulated but not executed immediately.
- Orders: Both limit orders and market orders can be entered. However, these orders are not matched or executed during this phase.
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2. Order Matching Session (9:08 AM – 9:12 AM)
- Purpose: This period is dedicated to matching the accumulated orders and determining the opening prices for the stocks. The exchange uses an algorithm to match buy and sell orders to establish a fair opening price based on supply and demand.
- Orders: No new orders can be placed or modified during this session. The system calculates the equilibrium price where the maximum number of shares can be traded.
3. Buffer Session (9:12 AM – 9:15 AM)
- Purpose: It serves as a buffer to address any discrepancies or technical issues that may have arisen during the order-matching phase.
- Orders: The buffer session helps ensure a smooth transition to the regular trading hours, allowing for the final adjustment of opening prices if needed.
4. Regular Market Session (9:15 AM – 3:30 PM)
- Purpose: The regular trading session starts at 9:15 AM. After the pre-open session, the market operates with full trading functionalities, and orders can be placed and executed as per normal market operations.
Participants of the Pre-Open Market Session
1. Institutional Investors
Large financial institutions such as mutual funds, hedge funds and investment banks often engage in pre-market trading. They may do so to adjust their portfolios or react to news events that occur outside regular trading hours.
2. Retail Investors
Individual investors can also trade during the pre-market session, but access may depend on the brokerage firm they use. Not all brokerages offer pre-market trading, and those that do may have specific requirements or limitations.
3. Professional Traders
This group includes day traders and other professionals who often trade outside regular hours to take advantage of market movements or news releases.
Types of Pre-Market Orders
1. Limit Orders
These are the most common type of orders during pre-market trading. A limit order specifies the price at which you’re willing to buy or sell a stock. If the stock reaches your specified price during the pre-market session, your order may be executed. If not, your order will remain unfilled until the regular market session or until you cancel it.
2. Market Orders
The market orders are used to buy or sell immediately at the best available price. They are less common in pre-market trading due to lower liquidity and wider bid-ask spreads. Some brokerages may not accept market orders in the pre-market session.
How Do Pre-Open Market Orders Work?
- Order Placement: You can place a pre-open market order through your brokerage’s trading platform if your brokerage supports it.
- Order Execution: Orders are matched and executed based on the available liquidity and the price at which buyers and sellers agree. Since liquidity is lower in pre-market trading, the execution of orders can be less predictable compared to regular market hours.
- Price Discovery
The pre-market session helps discover the opening price of a stock. Orders placed during this time contribute to setting this opening price, which can be influenced by news events, earnings reports and other relevant information.
- Order Duration
Pre-open market orders can be set to expire at the end of the pre-market session, or they can be carried over into the regular trading session if they remain unfilled.
- Risk and Liquidity
Due to lower trading volumes, pre-market trading can be more volatile and less liquid. This can result in wider bid-ask spreads and potentially greater price swings.
Considerations for Traders
1. Liquidity
The pre-market session generally has lower trading volumes compared to regular trading hours. This can result in wider bid-ask spreads and less liquidity, making it potentially riskier.
2. Price Volatility
Prices can be more volatile during the pre-market session due to lower liquidity, which can affect the execution price and may result in delays or higher trading costs.
3. Order Types
Not all order types are available during pre-market trading. Some brokerages may restrict the types of orders you can place, such as limiting or prohibiting the use of market orders.
4. News Impact
The news releases and earnings reports can significantly impact stock prices and volatility during pre-market trading.
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Wrapping Up
While trading during the pre-open market session offers unique opportunities, it also comes with certain risks, such as lower liquidity and higher volatility. Investors should consider the overall geopolitical and economic scenarios to make informed decisions.
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