Auction in Indian Stock Exchanges

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What are Auctions?

  • Auctions are initiated by the Exchanges on behalf of trading members for settlement-related reasons. If a Trade happens today (T-day), the settlement of shares takes place on (T+2) days. In some cases, due to some reasons, the obligations of delivery of shares fails.
  • The main reasons are shortages, bad deliveries, and objections.
  • Normally during short-selling position taken with a delivery option if the trader fails to buy-back the equal quantity of shares to square-off the position his broker will take part in Auction on behalf of him to settle the positions.
  • The failure of the seller to deliver the shares to the buyer on T+2 obligated is called short delivery.
  • The auction is conducted every day from 2:00 p.m. to 2:45 p.m.
  • The exchange does not specify any ‘auction price’. It allows the participants of the auction to sell shares within a specified range.
  • This range is normally +/-20% of the T+1 day closing Price. i.e. if Share closed on Rs. 100 on T+1 day then Upper limit of the range will be ‘100+ (20% of 100) = Rs 120’ and the lower price of the range will be ‘100 – (20% of 100) = Rs. 80’. In this case, orders will be placed between 80-120 range only.
  • There are three types of participants on the auction market: Initiator, Competitor and Solicitor.

Types of Participants in Auction

  • Initiator: The party who initiates the auction process is called an initiator.
  • Competitor:  The party who enters on the same side as of the initiator is called a competitor.
  • Solicitor: The party who enters on the opposite side as of the initiator is called a solicitor.

Auction Process

  • The trading members can participate in the Exchange initiated auctions by entering orders as a Solicitors.
  • e.g. If the exchange conducts a Buy-in auction as an initiator while the trading members entering sell orders are called solicitors.
  • When the auction starts, the competitor period for that auction also starts.
  • Competitor period is the period during which competitor order entries are allowed. 
  • Competitor orders are the orders which compete with the initiator’s order.
  • i.e. if the initiator’s order is a buy order, then all the buy order for that auctions other than the initiator’s order are competitor orders.
  • And if the initiator’s order is a sell order then all the sell orders for that auction other than initiators order are competitor orders.
  • After the competitor period ends, the solicitor period for that auction starts. 
  • Solicitor period is the period during which solicitor order entries are allowed.
  • Solicitor orders are the orders which are opposite to the initiator order
  • i.e. if the initiator order is a buy order, then all the sell orders for that auction are solicitor orders and if the initiator order is sell order, then all the buy orders for that auction are solicitor orders.
  • After the solicitor period, order matching takes place. The system calculates the trading price for the auction and all possible trades for the auctions are generated at the calculated trading price.
  • After this the auction is said to be complete.
  • Competitor period and solicitor period for any auction are set by the Exchange.

Entering  Auction Orders:

Auction order entry allows the user to enter orders into auctions that are currently running. –

Auction Order Modification:

The user is not allowed to Modify any auction orders.

Auction Order Cancellation:

    The user can cancel any solicitor order placed by him in any auction provided the solicitor period for that auction is not over.

Auction Order Matching:

    When the solicitor period for an auction is over, auction order matching starts for that auction. During this process, the system calculates the trading price for the auction based on the initiator order and the orders entered during the competitor and the solicitor period. At present for Exchange initiated auctions, the matching takes place at the respective solicitor order prices

The rules for matching of auctions are similar to that of the regular lot book  except for the following points:

  • Auction order matching takes place at the end of the solicitor period for the auction.
  • Auction matching takes place only across orders belonging to the same auction.
  • All auction trades take place at the auction price.