Markets regulator Sebi on Thursday introduced additional surveillance measures for stock exchanges to curb the misuse of the pre-open call auction session for initial public offering (IPO).
Structure of the Pre-Open Call Auction Session
Under this, Sebi said the session will be for a duration of 60 minutes starting at 9 am. Of which, 45 minutes will be allowed for order entry, order modification and order cancellation, 10 minutes for order matching and trade confirmation, and the remaining 5 minutes will be the buffer period to facilitate the transition from the pre-open session to the normal trading session.
The session will close randomly during the last ten minutes of order entry -- anytime between 35th and 45th minute of the order entry window. Such random closure will be system-driven, Sebi said in its circular.
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It is a mechanism to discover the opening price based on aggregated supply and demand for the underlying stocks on the first day of trading.
Adequate surveillance mechanisms
Stock exchanges have been directed to have adequate surveillance mechanisms for pre-open call auction sessions for IPOs to avoid any kind of manipulation.
Sebi observed that during the call auction in the pre-open session for certain IPO and relisted scrips, orders were placed at higher prices in large volumes and a significant portion of such orders were cancelled just before the closure of the call auction session. This may have created false demand and supply and possibly manipulated the price of the scrips to the detriment of common investors.
In addition to the surveillance mechanisms, the stock exchanges have been directed to generate alerts based on certain indicative parameters, including modification of prices significantly away from previously placed orders, cancelled quantity for a particular client exceeding 5 per cent of total cancelled quantity across the market during the pre-open session and value of cancelled quantity for a particular client exceeding 5 per cent of total value of cancelled quantity.
For the alerts generated based on these parameters, stock exchanges will have to provide a report to Sebi by the End of Day (EOD). Further, based on analysis, stock exchanges will seek explanations from the clients for the cancellations or modifications during the pre-open session.
To enhance transparency in pre-open call auction sessions, details of number and quantity of cancelled orders will also be displayed on the website of the stock exchange and terminals of trading members on a real-time basis for investors to make informed decisions on the pricing of such stocks.
The framework will be applicable from the 90th day of issuance of the circular.
