Check coming on illiquid scrip trade

BSE, NSE on April 8th, MCX-SX to follow later

Starting next week, about a tenth of the stocks on the National Stock Exchange (NSE) and a little over half of those on the Bombay Stock Exchange (BSE) will not be available for continuous trade.  

The two exchanges are to start their call auction mechanism for illiquid stocks from Monday, following a circular in February from the Securities and Exchange Board of India. Periodic call auctions will essentially break down the trading day for illiquid stocks into sessions of an hour each, during which orders will be matched for the first 45 minutes and put through in the final 15 minutes.

While the move might cut volatility, operational difficulties could affect implementation, suggest experts. A stock is classified as illiquid based on conditions such as if the average daily trading volume of a scrip in a quarter is less than 10,000 or if the average daily number of trades is less than 50 in a quarter.

Jitendra Panda, head of broking at Capital First, said the move would help reduce price volatility. “Prices won’t be wayward…It will help build confidence in the market that certain processes are in place,” he said.

While others agreed on the positives, they raised questions over whether people will trade in such sessions. “When the participation in the pre-open call auction for blue-chip stocks is low, how can participation in illiquid counters be high? How many will have the time and energy to participate in short bursts of eight minutes each hour?” asked Vinay Agrawal, executive director, Angel Broking.

Satish Menon, executive director at Geojit BNP Paribas, raised similar questions. “Concept-wise, it is good but we will need to see how...(it) pans out. People might not be able to take advantage of it through the day. Dealers would need to re-enter the order every hour. They would need to keep track of every order every hour, which would make it a very tedious process,” he said.

Such stocks account for a fair number of listed entities, although their combined market capitalisation on both exchanges together is less than Rs 1 lakh crore.

The BSE has 3,887 actively listed companies; around 2,050 are in the illiquid category. There are 2,295 companies on the NSE, of which 262 have been identified as illiquid.

The MCX Stock Exchange (MCX-SX) has not yet announced when it would begin, though a spokesperson stated it had already identified 28 illiquid scrips. “Considering that MCX-SX has just introduced trading in its equity segment, it will announce a schedule for introducing the call auction segment in a larger number of securities, including these 28, separately in the near future,” said the spokesperson. MCX-SX currently offers trading in 1,116 companies under the ‘Permitted to Trade’ category.
SEBI’S LIQUIDITY PUMP

What's an illiquid stock?

• An illiquid stock is one where the average daily trading volume in a quarter is less than 10,000 or the average daily number of trades is less than 50 in a quarter

How does a call-auction work?

• Periodic call auctions will involve trading of illiquid stocks in sessions of one hour each during which orders will be matched for the first 45 minutes and executed in the last 15 minutes

How many companies will be affected?

• About 10 per cent of stocks listed on the NSE and half of the stocks listed on the BSE have been identified for the auctions
• MCX-SX has so far identified 28 scrips of the 1,116 under its ‘Permitted to Trade’ category

The good and the bad

• Expected to reduce volatility, aid better price discovery
• Experts say constant need for monitoring of orders might make it tedious to trade in these stocks