Periodic Call Auction (also in the form of PCA) is an exchange system by Securities Exchange Board of India (SEBI) that is supposed to be responsible for curbing the unreasonable price movements in more illiquid stocks. Illiquid shares, again, are those with no market volubility.

There were narrowed-out trading-and-buying commitments on a timed basis-a concept that could accomplish a lot more on discovery of price in these stocks and allow for honest trading for those shares where the liquidity was missing.

As outlined by the National Stock Exchange, equity market illiquid securities were traded through periodic call auctions and not in a traditional continuous trading mode.

Why was it introduced?

The SMAC later found that an advisory committee formally called on the secondary market advisory committee to introduce call auction trading for illiquid stocks.

Main objectives of PCA are:

Reducing excessive price volatility in low-liquidity stocks
Creating grouped orders-matching for price discovery
Preventing the market manipulation of thinly traded shares

By gaining orders, either buy or sell, produced during an indicated time period and subsequently carried out collectively in a predetermined price mechanism, the system stands capable of being much more stable and fair-handed in determining prices.

What Do We Mean By Illiquidity?

Illiquid stocks are the ones in which there is hardly any volume at all, indicating very limited investor participation. Since there are lesser numbers of buyers and sellers, such stocks often encounter wide fluctuations in prices.

Illiquidity will normally mean, as per the guidelines of the Securities Exchange Board of India:

Stocks with over 50 trades per day as an average
Stocks with a daily volume of fewer than 10,000
Stocks satisfying any other conditions on liquidity as prescribed by the exchange

The Periodic Call Auction mechanism is thus chosen to control volatility in such stocks.

The Working of Periodic Call Auction

In call auctions, trading does not happen all the time. Orders with a window of opportunity for matching are gathered and then matched at a closing split price.

These are the three phases of a general auction session:

1. Order Placement Period

This is the phase when sellers and buyers are placing orders.

2. Order Matching Period

The system deliberates a final price since orders are carefully matched.

3. Buffer Period

After the order matching period is over, there is a short break before the next auction sequence begins.

Only in the order-matching phase would deals be propagated, where indeed they will only be executed if somebody else is willing to strike a deal.

Periodic Call Auction Session Timings

Most days would have around six scheduled periodic call auction sessions. One session runs for one hour.

Here are the running hours for the general sessions:

SessionOrder PlacementOrder MatchingBuffer Period19:30 AM – 10:15 AM10:15 AM – 10:23 AM10:24 AM – 10:30 AM210:30 AM – 11:15 AM11:15 AM – 11:23 AM11:24 AM – 11:30 AM311:30 AM – 12:15 PM12:15 PM – 12:23 PM12:24 PM – 12:30 PM412:30 PM – 1:15 PM1:15 PM – 1:23 PM1:23 PM – 1:30 PM51:30 PM – 2:15 PM2:15 PM – 2:23 PM2:24 PM – 2:30 PM62:30 PM – 3:15 PM3:15 PM – 3:23 PM3:24 PM – 3:30 PM

Periodic call auction trading of stocks

To buy or sell stocks traded in the periodic call auction mechanism, the investor must place the order during the order placement window that normally lasts for 45 minutes.

The process is:

During the order placement phase, the investors enter their buy or sell orders.
Orders can also be amended or canceled during this phase.
After the close of the window, the process of order matching commences.
Approximately 8 minutes are in order for the matching of the orders.
Trades are executed based on matching of the orders at the equilibrium price.
If the orders are not matched, they remain unexecuted.

Benefits of Periodic Call Auction

The mechanism of the periodic call auction is also propounded with a number of advantages to the market:

Reduced Volatility of Prices

Aggregation of orders results in distribution of such order execution sequentially, thereby fissuring and mere enhancement of price manipulation in the illiquid stock.

Price requirements will thus appear within the call auction period to project clear-cut values as correctly as possible.

Another benefit may ensue from the fact that it continues operating in conditions in which there is little liquidity by creating a controlled atmosphere that improves the business process of such stocks.

The reduced transaction frequency aids in keeping price-manipulation practices limited.

In conclusion

The periodic call auction system was introduced as a regulatory mechanism by SEBI over trading in illiquid stocks. Only periods strictly designated for trading greatly restrict price discovery and consequently calm price volatility to the benefit of the whole.

Therefore, these systems safeguard retail traders and the overall stability of the market by allowing traded markets, where very little liquidity exists.

Frequently Asked Questions (FAQs)

What are periodic call auction sessions?

A periodic call auction consists of a trading window during which buy and sell orders for illiquid stocks are grouped together to be executed at one single equilibrium price.

What does illiquid stock mean?

Illiquid stocks are where there is low trading activity absent market participation, often with as few as 50 trades per day, or just low daily trading volume.

How many auction sessions per day are there?

Six periodic call auctions are usually conducted during a trading day on the stock market.

Can the investors modify or cancel their orders during PCA?

Investors are allowed to modify or cancel their orders during the order placement window, which is usually open for about 45 minutes.

Why did SEBI introduce periodic call auctions?

The purpose of its introduction by SEBI is to reduce volatility, improve price discovery, and bring about fairness in trading in spots where low liquidity is the main criterion.

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What is the Periodic Call Auction?