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Call auctions have no positive impact: IIM-A study

NSE used to have call auctions at open and close till 1999 but was discontinued later

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A latest research by professors of the Indian Institute of Management - Ahmedabad (IIM-A) revealed that opening call auction at the National Stock Exchange of India (NSE) for its top 50 large cap stocks, fails to serve its purpose due to low volumes and price reversal issues.

Call auction is an alternative to the continuous order matching mechanism at the equities trading for opening the trades. Call markets aggregate information over time and facilitate price discovery even when continuous markets fail. In such cases, call markets are able to discover prices more effectively by pooling orders over time and executing them at a uniform price.

used to have at open and close till 1999 but was discontinued later. The call auctions are considered to be aimed at reducing the problem of price discrimination for the traders and make trading less costly. It was also expected that a call auction will be able to attract high volume and result in better price discovery.

The working paper 'Impact of the Introduction of Call Auction on price discovery: Evidence from the Indian Stock Market', which is jointly authored by Sobhesh Kumar Agarwalla, Joshy Jacob and Ajay Pandey showed of the opening call auction two years after its reintroduction by National Stock Exchange of India (NSE) on October 18, 2010.

"Call markets are claimed to aggregate information and facilitate price discovery where continuous markets may fail. Possibly due to faulty design or due to thick market externalities, the impact of the introduction of call (auction) has not been found uniformly beneficial," the study noted.

"There are low volumes at the call auction at the opening of daily trades. This makes institutions wary of disclosing their trade information. Also, due to low volumes at the call auction, trade will not get completed and there are fears of information getting revealed to the rest of the market," said Ajay Pandey, co-author of the working paper and a faculty at the IIM-A.

"On analysing the high-frequency data of returns and volume, we found that the call auctions attract insignificant volumes, the intra-day volume and volatility dynamics remain unaffected by the call auction except for, the delay induced by call auctions and there is a tendency for price reversal in the continuous normal market from the price discovered in the call auction," the study stated.

A large number of market researchers and experts have been advocating for the call auctions at the market openings on the ground of their ability to temporally aggregate the orders when the information asymmetry is high. Consequently, it was expected that a call auction would be able to attract high volumes and result in better price discovery.

"Besides very less volumes, the intra-day volatility takes about 30 minutes to stabilise. The negative intra-day return correlations suggest excessive price movement at the call auction. This is not a good sign for the markets," said Pandey adding that in the matured markets, there are average daily trade size in the call auction is about 2000 stocks per day, whereas in India it hovers around 100 stocks per day.

"It is upto the regulator to take a decision based on the research that we've done. There is a need for increased volumes at the call auction. One can't predict future prospects of call auction in the current level of participation," he said.

In 2010-11, NSE controlled a market share of 76.36% in the cash market segment and 100% in the individual futures and options segment, the study noted. The average trading volume of NSE's cash market segment has increased from $192.3 billion (Rs 8,39,000 crore) in 1999-2000 to $801.2 billion (Rs 35,77,400 crore) in 2010-11.

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