How is the NSE/BSE Stock open Price determined?

A couple of factors determine the opening price of a stock:

1. Demand and supply for a stock (major factor)

2. Previous day’s closing price (used as reference point in some cases)

Before we move into how the opening price is computed, let’s understand the timeline of the pre-open session.

Pre-open session

Pre-open session is a 15-minute long session (9:00 AM to 9:15 AM), which helps in the discovery of opening prices of stocks.

It has three parts:

Opening price

The pre-open session begins with intake of orders from market participants. Then, the matching of buy and sell orders is carried out by the stock exchange in order to arrive at the opening price. The opening price, also known as equilibrium price, is computed such that a maximum number of shares get traded based on the buy and sell orders received. This method is known as call auction.

I will try to explain the method using an example to make it easy for everyone to understand.

So let’s use State Bank of India as an example. Let’s say that SBI closed at 274 in the previous session. In today’s session, the exchange has received multiple orders for the stock and we will consider the below as the order book for SBI at 9:08 AM, which marks the end of the pre-open session.

Going by the above order book, we have a single price at which both buy and sell orders can be matched. The equilibrium price for SBI is 275, since this is the price at which maximum number of shares can be matched. Hence, the opening price of SBI will be 275.

The above example is a simple scenario. In reality, we may have situations where there is:

1. More than one price point with same matched quantity: The opening price will be the price at which the imbalance quantity is the minimum.

2. More than one price point with same matched quantity and same imbalance quantity: The opening price will be the price which is nearer to the previous day’s closing price.

3. No price discovery in pre-open session: In cases when there is no price discovery in the pre-open session, the price for the first trade in the normal market shall serve as the opening price. This could happen at times when there are no limit orders for a stock and hence opening price would not get discovered.

I hope you found the answer useful.