In this article, we’ll discuss

1. What is a Pre-Market  Session?
2. Can we trade during a Pre-Market Session?
3. And most importantly, is it advisable to trade during Pre- Market?

Stock market timing

First of all, let’s understand the big picture about the stock market timing.

Most of us are aware that the markets are open between 09:15 am to 03:30 pm, and these are called regular market hours. This is the timing during which you can buy and sell shares.

You can do whatever you want, but this is not the complete picture because along with this time, the market is also open between 09:00 AM to 09:15 AM and then there is something between 03:30 PM to 04:00 PM as well. 

• The time between 09:00 to 09:15 is called Pre Market.
• The time between 03:30 to 04:00 is called Post Market. 

What is Pre-Market?

Pre-Market is a relatively new concept in the Indian stock market. Before 2010, there was no Pre-Market session. The market used to open right away and people used to trade.  

Due to that, things were not that smooth, especially in the first 10-15 minutes of the market opening.

Why? As there is always a pent up news flow from the previous day and people react to that all at the same time.

For example, news related to some specific company’s earnings being worse, a firm getting bankrupt, etc. or something to do with corporate announcements, like splits, bonus shares or some kind of acquisition. It could also be due to or any other news from the other markets such as the US, Asian or the European market.

So all these news events, corporate announcements and the earnings, all used to be piled up from the night before and people were waiting for the next day for the market to open. What used to happen was that there used to be chaos due to the news and people reacted differently.

This used to create a flux of orders during the opening of the market and that in turn caused chaos and price instability in the first 10 to 15 minutes. For example, I can tell you from my own experience that let us say, a stock previously closed at 100 rupees and due to this chaos, would gap up 103 rupees.

However, from that gap up of 3%, the stock would come down 5% and it would again go back up to let’s say 7 or 8%. So this kind of volatility, which was induced by this huge influx of orders from different people induced a lot of volatility in the market. What happened was due to this volatility, the retail traders were getting hurt.

So let’s say you traded for 10 lakh rupees of shares. Now, from the point you entered, the stock went down 5% and now you’re sitting on a loss of 50,000 rupees. Would you, as a trader will be willing to take a loss of 50,000 rupees? Most likely not. So, a lot of retail traders did not know how the market would react in the beginning due to the initial volatilities and used to get their stop losses hit.

Hence a lot of retail investors used to incur heavy losses.

Stock Exchanges Stepped In

So in 2010, NSE decided that this was enough. They came up with a mechanism to discover the opening price.

They decided to come up with some sort of a cushion, where they could absorb these orders and come up with the opening price at the opening of the regular market. This would ensure high volatility was avoided which was quite dangerous for retail traders.

So it is at this time that, the exchanges decided to have the pre-market session, i.e. basically the time between 09:00 to 09:15.

It was designed to contain the chaos and smoothly arrive at the opening price of stocks and indices.

How exactly does it work?

While we understand the concept behind the Pre-market, how exactly does it work? For understanding the pre-market, we have to break it down further. We know that pre-market is between 9 Am to 9:15 AM, but pre-market needs to be broken down into 3  parts to understand exactly what happens during these 15 minutes.

Order Collection:

So between 9:00 AM to 9:07 AM, there is a call order collection window and as the name indicates, this is the time during which the exchanges collect the orders from buyers and sellers. If I, for example, want to place an order, this is the time I can place and modify the order. 

If I cancel the order, the exchange will just collect and not execute the order.

Cut off time:

Now, after the collection period is over, between 9:07 AM to 9:08 AM, there is a random cutoff time. The reason it is random is that it is not exactly a specified time and is to avoid some kind of manipulation, especially by the big institutions. 

Order Matching:

Once the cutoff time happens, the exchange will take all those orders and will match them. So they match the buyers with the sellers, depending on the kind of orders, price and quantity. So the remaining time between 9:08 AM to 9:15 AM is used for matching the orders.

The idea is to match the buyers and sellers and then arrive at the opening price and so once the opening price is arrived at, the stock or the index will open. This happens exactly at  09:15 AM. 

Frequently Asked Questions:

So here are the frequently asked questions about pre-market and let me try to answer them.

Is pre-market allowed for retail traders and investors?

Some people believe that this 15 minutes probably is for big institutions or some traders ,but that is not the case. This is open for everybody and if you can see the video, I, being a retail trader was able to place an order. So there is no restriction whatsoever for you to place an order during this time.

Can I trade futures and options during pre-market?

No, you cannot place orders for futures or options during pre-market and there is a very good reason for that which  I don’t want to get into right now.

What happens to the unexecuted order?

So you place an order at a certain price, but during those 15 minutes, the order did not get executed. So will it get cancelled or will it get carried over to the 9:15 AM session? The answer to that question is yes, the order will get carried over to the regular market hours. 

Issues with Pre Market

It’s not as simple as just placing an order and being happy with it. There are some issues that you need to be aware of and issue number 1 is the liquidity issue. What happens is there are not enough buyers and not enough sellers. At this time, most of the institutions and retail participants participate between the regular market hours of 9:15 AM till 3:30 PM.

Hence, liquidity issue means that there are not enough people to buy and sell and because of that, you see wider spreads. Wider spreads mean a huge price difference and for the scripts that are not rated, the spreads can even be wider.

Due to these wider spreads, issue number 2 is you get an unfavourable price. If you’ve placed a market order, for example, on a particular stock, the price that you probably will get will not be that well most of the time. You need to be aware that if we want to place an order, it has to be a limit order so that, you know, at what price, the order will get executed.

If it’s a market order, then you have to be ready for a shock because the liquidity will be bad and you can be matched with a buyer or a seller who is giving you a very bad price. Now, the next question is, should I trade in the pre-market?

So being able to trade is one thing, but should you do it or not is completely another. In my experience, the way I do it, I don’t trade in the pre-market session because it doesn’t make any sense. If I were to trade something, I would rather wait for the regular market so that I don’t have to deal with liquidity issues. However, I have placed a couple of orders in the past, only for those cases where I was holding that stock.

I was expecting the stock to open with a big gap up and in order to make sure that I captured all the news flow, which was causing the gap up, I placed some orders. However, I don’t think I necessarily got a lot of advantage out of that because I probably would have done the same thing at 9:15 also.

The fact is that most of the time, I do not place any orders during the pre-market.

Subscribe to our channel Now.