Exclusive: Pre-opening session for single stock derivatives? Market regulator's working group exploring idea for better price discovery

Just like the pre-open session in the cash segment, there can be a similar session for stocks in the futures and options (F&O) segment too. A working group of market regulator Securities and Exchange Board of India (SEBI) is exploring this idea. The working group is discussing the proposal with stock exchanges, clearing corporations, brokers, and independent experts. The idea of the pre-open session is to improve price discovery in the segment. According to one source aware of the discussions: “The idea is to start the pre-open session with Futures... But Options along with next or far month futures contracts not being uniformly liquid may be excluded from such pre-open session."

The idea of having such a pre-open session is to minimise the volatility in securities during the market opening every day. All the buy and sell orders are matched. The demand and supply in this session help to establish the opening price. The pre-market session is conducted between 9:00 am and 9:15 am. During this period, pre-market session orders are collected, modified, or cancelled. After 9:08 am to 9:15 am, no new orders can be placed, but only the orders in place are matched and trades confirmed.

Currently, the F&O segment starts with zero pending orders, which leads to increased opening volatility. In the cash segment, there is a batch auction process, which starts from 9:00 am to 9:07 am, on the basis of which the open price is decided. If there are unexecuted orders, it is carried out to a normal trading session with continuous trading starting at 9:15 am. This process reduces volatility and helps in better price discovery. A similar idea is being explored for single stocks in the F&O segment.

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Another source part of the working group and aware of the discussions said, “The derivatives aid in price discovery and not having pre-open segment hampers price discovery in this session. Though, participation in the cash segment in pre-open is also limited but it certainly helps as a process.”

A third source said: “Largely there is agreement on the idea but exchanges have to tweak the system for this so their readiness is important.” He further said that after discussions in the group, the proposal will go to the SEBI committee on secondary market-related matters and will be followed by a discussion paper.

Another market participant not part of the working group said: "It's good to have a pre-open session for single stock derivatives but a post-closing session like the cash market is equally important."

Currently, the biggest exchange, NSE has 227 stocks in the futures and options (F&O) segment. If the idea is translated into regulation, the pre-open session will help the traders to place their bets seeing the trends.

At the time of publishing this story, SEBI was yet to respond to Zee Business's queries about the proposal.