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What is Periodic Call Auction & Why Are Some Socks Traded In This Category

27 Jul 2023

Introduction

  • In 2013, SEBI (Securities and Exchange Board of India) introduced the periodic call auction.
  • The key motive behind the step was to reduce volatility in illiquid stocks.
  • As per the SEBI guidelines, illiquid stocks have an average daily trade below 50.
  • Also, their trading volume is less than 10,000, among other conditions. 

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What is the Periodic Call Auction Mechanism?

  • In the periodic call auction, beginning at 9:30 AM and operating similarly to pre-market equity stock sessions, six auction sessions of an hour each are conducted throughout each trading day.
  • Participants are given 45 minutes to put, modify, or cancel orders. After that, all received orders are matched within eight minutes, and then trade confirmation takes place. Also, there is a seven-minute buffer before the commencement of another call auction session.
  • Periodic call auctions provide an organised and controlled trading environment for illiquid stocks. They help guarantee fair price discovery while decreasing excessive volatility.
Session  Start Time- Order Placement Order matching Buffer period
1 09:30 a.m. – 10:15 a.m. 10:15 a.m. –10:23 a.m. 10:24 a.m. – 10:30 a.m.
2 10:30 a.m. – 11:15 a.m. 11:15 a.m. – 11:23 a.m. 11:24 a.m. – 11:30 a.m.
3 11:30 a.m. – 12:15 p.m. 12:15 p.m. – 12:23 p. m. 12:24 p.m. – 12:30 p.m.
4 12:30 p.m. – 01:15 p.m.  01:15 p.m. – 1:23 p.m. 01:24 p.m. – 01:30 p.m.
5 01:30 p.m. – 02:15 p.m. 02:15 p.m. – 2:23 p.m. 02:24 p.m. – 02:30 p.m.
6 02:30 p.m. – 03:15 p.m. 03:15 p.m. – 3:23 p.m. 03:24 p.m. – 03:30 p.m.
  • If you plan to purchase or sell illiquid stocks subject to periodic call auctions, orders should be placed within 45 minutes and executed if your bid matches within eight minutes.

A Closer Look at Illiquid Stocks

  • Illiquid stocks refer to securities that cannot be easily converted to cash, making trading difficult or impossible.
  • Finding someone willing to buy or sell at a fair price makes trading impossible. Thus, illiquid stocks have lower values than liquid ones. 
  • These stocks may be risky investments because it can be challenging to manage their risks. However, they could offer high returns should the fortunes of their company improve.
  • Illiquid stocks are unpopular with investors because of their risk-prone nature.
  • For instance, in an emergency scenario requiring fast selling for emergency expenses, you may not find buyers willing to accept your price quickly enough.
  • So, it's important that investors carefully consider all their options when investing in these types of investments.
  • However, there are a few advantages as well. Owners of illiquid stocks may benefit from purchasing shares at a discount due to the fewer buyers and sellers on the market.
  • This makes it possible to buy it at prices lower than its true worth. Investors can then potentially gain from any increase in price over time.

Conclusion

  • Now that you know what a periodic call auction is and what shares fall under this category, you must consider investing wisely. Illiquid stocks are publicly traded companies' shares.
  • Yet, as stated earlier, illiquid stocks can't be liquidated easily.
  • However, they have the potential to offer greater returns. Hence, invest wisely after considering all the pros and cons and your risk tolerance.

 

Related Articles: What Is In The Money Call Option? | What Is Out Of The Money Call Option | What Is a Put-Call Ratio?

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