Market Mastery

Webinar by Vishal Malkan

Find the weak links

in your portfolio by Vishal Malkan

Markets regulator Securities and Exchange Board of India (SEBI) is considering a uniform system for stock exchanges to accept orders during the pre-open session, after finding differences in the way NSE, BSE and Metropolitan Stock Exchange (MSE) currently handle them.

Proposal: Order display only after margin confirmation

Under the proposed system, all exchanges will follow the same process. First, the exchange will check whether the investor has sufficient margin. Only after the margin is confirmed will the order be displayed in the order book. However, the order will retain the time stamp of when it was originally received by the exchange, and not when the margin check was completed.

For example, if an investor places an order at 9:00 AM but the margin check is completed at 9:00:02 AM, the order will still carry the 9:00 AM time stamp and will be in order que accordingly.

One market participant aware of the ongoing discussions said, “Although traders had not raised any major concerns, SEBI is of the view that the existing process has the potential for misuse and has therefore decided to tweak it”.

Why the Review

The review was necessary because different exchanges were following different processes for accepting orders. An investor placing orders on multiple exchanges at the same time could consequently receive different time stamps and different order priorities. The time taken for margin verification can also vary depending on whether the clearing corporation is located within the exchange premises or operates from a separate location.

Further, the order acceptance mechanism has a bearing on the equilibrium price disseminated for each scrip during the pre-open session. This assumes significance as unexecuted orders are carried forward to the normal trading session in accordance with time priority, making the precise time of order entry crucial in determining an investor's position in the order queue.

The proposed mechanism is expected to bring uniformity in order processing across exchanges, improve transparency in price discovery and ensure fair treatment of investors. It is expected that the same methodology may be extended for the Closing Auction Session (CAS) in future.

Also read: SAT upholds SEBI fraud findings against former Ricoh India CEO Takano, cuts penalty to Rs 10 lakh

What is the current system?

At present, NSE and MSE check whether an investor has sufficient margin before accepting an order and displaying it in the order book. BSE, however, first displays the order and checks margin sufficiency afterwards. If the investor does not have enough margin, the order is cancelled and removed from the order book.

SEBI believes these different practices can create problems for investors placing orders on multiple exchanges at the same time. They can also affect the time priority of orders, which determines the sequence in which orders are considered for execution.

The need for a uniform system becomes important when a stock witnesses sharp buying interest following positive news flows, such as strong quarterly results, a major corporate announcement or a favourable regulatory development. During such periods, a large number of investors may place buy orders during the pre-open session, sometimes at prices significantly above the previous closing price.

If orders without sufficient margins are temporarily displayed in the order book, they can influence the indicative price, which is used to determine the opening price of the stock. Such orders may also create a misleading picture of demand and supply before being cancelled.

SEBI wants to ensure that only orders backed by sufficient margins enter the order book, reducing the possibility of non-genuine orders and practices such as spoofing. At the same time, it wants to ensure that genuine investors do not lose their place in the queue because of delays in margin verification.

The proposal has been discussed with stakeholder and largely its agreed but SEBI is yet to issue any final framework for the same.