Learn about pre-open session and call auctions

HOW is the opening price found? (derive from scratch)

We want the price $P$ that lets the most shares trade.

Step 1 — Build the demand and supply curves. At any candidate price $P$ :

Cumulative demand $D(P)$ = shares wanted by all buyers willing to pay ≥ P (buyers bidding high will accept lower prices too).
Cumulative supply $S(P)$ = shares offered by all sellers willing to accept ≤ P.

Why this step? A buyer bidding ₹101 is happy to buy at ₹100; a seller asking ₹99 is happy to sell at ₹100. So demand falls as $P$ rises, supply rises as $P$ rises.

Step 2 — Tradable quantity at each price. You can only match what both sides support: $Q(P) = \min\big(D(P),\, S(P)\big)$ Why? If buyers want 500 but sellers offer 300, only 300 trade — the min.

Step 3 — Maximise. $P^{*} = \arg\max_{P}\; Q(P) = \arg\max_{P}\; \min\big(D(P),\,S(P)\big)$

Market orders (no price) are treated as willing to trade at any price, so they sit at the top of demand / bottom of supply and are counted at every candidate $P$ .

Figure — Learn about pre-open session and call auctions

Worked example 1 — a clean order book

Order book collected during pre-open:

Buy Qty	Bid Price	Ask Price	Sell Qty
100	105	101	100
200	103	103	300
300	101	105	200

Build cumulative demand (buyers accept any price ≤ their bid; count buyers with bid ≥ P):

At 101: buyers bidding ≥101 = 100+200+300 = 600
At 103: 100+200 = 300
At 105: 100

Why? Higher price → fewer buyers qualify.

Build cumulative supply (sellers with ask ≤ P):

At 101: 100 = 100
At 103: 100+300 = 400
At 105: 100+300+200 = 600

Tradable $Q=\min(D,S)$ :

101: min(600,100)=100
103: min(300,400)=300
105: min(100,600)=100

Max is 300 at P = 103 → opening price ₹103, 300 shares trade. Why this step? 103 lets the most shares change hands — that's the definition.

Worked example 2 — a tie, broken by minimum imbalance

Suppose $Q(102)=Q(104)=500$ (a tie).

At 102: $D=500,\ S=520 \Rightarrow$ unmatched $=20$
At 104: $D=540,\ S=500 \Rightarrow$ unmatched $=40$

Tie-breaker 1 → pick minimum unmatched → ₹102 wins. Why? Less leftover imbalance = a more "balanced" fair price.

Worked example 3 — no crossing orders (no equilibrium)

Highest bid = ₹99, lowest ask = ₹101. Nobody's willing to meet. Then $Q(P)=0$ everywhere → no equilibrium price. NSE rule: opening price = previous close (or, for the very first trade in continuous session, first traded price). Uncrossed orders shift into the continuous 9:15 book. Why? You can't discover a price from trades that can't happen.

Recall Feynman: explain it to a 12-year-old

Imagine everyone in class secretly writes down how many candies they want to buy and the top price they'll pay, and others write how many they'll sell and their lowest price. Instead of trading one-at-a-time (where the fastest kid grabs the best deal), the teacher waits, collects all the notes, then finds the one price where the most candies can be swapped. Everyone trades at that same price. Fair, calm, no pushing. That "collect first, match once at one price" is a call auction, and doing it before school starts is the pre-open session.

Common mistakes (Steel-manned)

The 20% that gives 80%

Pre-open = call auction, 9:00–9:15, three phases (collect → match → buffer).
Opening price = max matched quantity, $P^*=\arg\max\min(D,S)$ .
Everyone trades at one price; market orders count at any price.
No crossing → opening price = previous close.

Flashcards

What is a call auction?

A mechanism that pools orders over a window and matches them all simultaneously at ONE equilibrium price, instead of continuously one-by-one.

What are the timings of NSE's pre-open session?

9:00–9:15 AM (Order collection 9:00–9:08, Matching 9:08–9:12, Buffer 9:12–9:15).

How is the opening price determined?

The price that maximises the tradable quantity, i.e.

P^*=\arg\max_P \min(D(P),S(P))

Tradable quantity at price P is?

Q(P)=\min(\text{cumulative demand } D(P),\ \text{cumulative supply } S(P))

First tie-breaker when multiple prices give the same max quantity?

Choose the price with the minimum unmatched (leftover) quantity

|D-S|

Second tie-breaker after minimum imbalance?

Price with least change from the previous close.

Do trades execute during the order-collection phase?

No — orders are only collected/modified/cancelled; matching happens only in 9:08–9:12.

How are market orders treated in the auction?

As willing to trade at ANY price — placed at top of demand / bottom of supply, counted at every candidate price.

Price everyone pays/receives in a call auction?

The single equilibrium price, regardless of their individual bid/ask.

What happens if no orders cross (bid < ask everywhere)?

No equilibrium; opening price defaults to the previous close and orders move to the continuous session.

Why use a call auction at the open instead of continuous trading?

To absorb overnight news calmly and discover one fair, stable opening price, avoiding chaotic gap volatility.

Connections

Continuous Trading & Price-Time Priority
Market Orders vs Limit Orders
Circuit Breakers & Price Bands
Closing Session & Closing Price Auction
Order Book & Depth
Liquidity & Bid-Ask Spread

Concept Map

Hinglish (regional understanding)

Intuition Hinglish mein samjho

Dekho, subah 9:00 baje market seedha open nahi hota. Pehle ek pre-open session chalta hai (9:00–9:15), jo actually ek call auction hai. Iska simple funda: raat bhar duniya bhar ki news aati hai, to agar market seedha continuous trading se khule to pehla order aate hi match ho jaata aur ek bada ya panic order price ko idhar-udhar phenk deta. Isliye system pehle sabke orders collect karta hai (9:00–9:08), fir ek hi price par sabko match karta hai (9:08–9:12), fir thoda buffer (9:12–9:15). Ise yaad rakho: Collect, Cross, Chill.

Opening price kaise nikalta hai? Bahut simple logic — jis price par sabse zyada shares trade ho sakein, wahi opening price banega. Formula ki bhasha mein: har candidate price par cumulative demand $D(P)$ aur cumulative supply $S(P)$ banao, tradable quantity $Q=\min(D,S)$ nikalo, aur jahan $Q$ maximum ho wahi $P^*$ . Agar do prices barabar ho jayein to jiska imbalance (leftover) kam ho wo jeetega, warna jo previous close ke paas ho.

Ek important baat: is auction mein sabko same equilibrium price milta hai, chahe kisi ne 105 bid kiya ho ya 101 — normal trading jaisa alag-alag price nahi. Aur market orders ko "kisi bhi price par ready" maana jaata hai, isliye wo demand ke top aur supply ke bottom par count hote hain. Agar koi order cross hi nahi karta (bid sabka ask se neeche), to koi equilibrium nahi banta aur opening price previous close le liya jaata hai. Exam aur real trading dono ke liye yeh 20% concept 80% kaam kar jaata hai.

WHY does this exist?

WHAT is it? (definitions)

HOW is the opening price found? (derive from scratch)

Worked example 1 — a clean order book

Worked example 2 — a tie, broken by minimum imbalance

Worked example 3 — no crossing orders (no equilibrium)

Common mistakes (Steel-manned)

The 20% that gives 80%

Flashcards

Connections

Concept Map

Hinglish (regional understanding)

Test yourself — Order Types & Mechanics

Connections