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After successfully implementing the pre-open call auction mechanism for blue-chip stocks, the Securities and Exchange Board of India (Sebi) has extended the framework to all other scrips in the equity market. Further, the regulator has introduced a new concept of hourly trading through call auction for illiquid scrips.
The pre-open call auction is the process to arrive at an equilibrium price for a scrip based on a bidding process.
At present, this mechanism is used for Sensex and Nifty scrips and for first-day trading of initial public offerings and re-listed stocks. The call auction mechanism has helped reduce high volatility seen during commencement of opening trades everyday.
Going ahead, trading in illiquid scrips will be conducted only through hourly call auction sessions, Sebi said. Along with the illiquid scrips identified by the bourses, stocks that have trading volume of less than 10,000 or average daily trades of less than 50 shall be classified as illiquid.
At the end of the December quarter, BSE had identified a little 2,000 illiquid scrips.
"The issue of extending call auction mechanism in the pre-open session to all scrips was deliberated in the Secondary Market Advisory Committee (SMAC). SMAC also made recommendations on introduction of trading through the periodic call auction mechanism for illiquid scrips in the equity market," Sebi said in a circular.
Periodic call auction sessions for illiquid scrips will be conducted for one hour throughout market hours. Meanwhile, the call auction session duration for all other scrips will be for an hour, of which 45 minutes shall be allowed for order entry, order modification and order cancellation, eight minutes for order matching and trade confirmation and remaining seven minutes will be a buffer period for closing the current session and facilitating transition to the next session.
The scrip will be shifted to the normal trading segment after it has remained in periodic call auction for at least two quarters, Sebi has said.
The regulator has also set a penalty to prevent stock price manipulation during such sessions. Sebi said "If the maximum of buy price entered by a particular client equals or is higher than the minimum sell price entered by the same client and if this results in trades, it would attract a penalty."
The penalty for such trade will be 0.5 per cent of the trade value for buy and sale orders each or Rs 2,500 for a buy trade and Rs 2,500 for a sell trade, whichever is higher.
"The penalty shall be calculated and charged by the exchange and collected from the trading members on a daily basis. Trading members may recover such penalty from clients. The penalty so collected shall be deposited to the Investor Protection Fund," the Sebi circular said.