This empirical study examines the impact of opening Call Auction (CA) on price discovery of BSE Sensex stocks. CA was introduced on BSE Sensex stocks on October 18, 2010. The objectives of CA are to increase the price efficiency in the opening session, minimize the volatility and to make prices reflect the overnight information. To investigate efficient price discovery, the study adopted Cohen et al.’s (1983a) methodology. The data of one year before and one year after the introduction of CA was considered as the event window period. The study hypothesized that CA facilitates the price discovery. Following Pagano and Schwartz (2003), adjusted R2 was used as the parameter to measure the price discovery. Cohen et al. (1983b) have suggested a methodology using the first and second pass beta estimators to examine the intervalling effect of the securities and market friction. Applying this methodology to the data, the study found that opening CA mechanism does not improve the price discovery. This study contributes to the existing literature on market microstructure and also helps the regulators and exchanges to know the effectiveness of CA and the level of market friction.

What determines the prices of securities in the financial market is of great importance to investors, companies, regulators and the market participants. A number of factors influence the prices of securities. Therefore, it is important to know the factors and the process of price discovery. Market regulators around the world have initiated a number of measures to ensure that the prices of financial securities reflect their intrinsic values. One of these measures is the changes in the market microstructure infrastructure. In India, Bombay Stock Exchange (BSE) and National Stock Exchange of India (NSE) have initiated some measures to improve the market microstructure. The BSE and NSE introduced opening Call Auction (CA) trading mechanism on BSE Sensex and NSE Nifty stocks on October 18, 2010. The introduction of Continuous Electronic Order System (CEOS) as trading mechanism for whole day was a major change from the open-outcry system of trading. The CEOS allows member traders to place an order and match the orders placed by other traders. In this system of trading, the impact of overnight information flow and the influence of foreign market movements were supposed to be reflected in the opening prices of Indian stock prices. To improve the price discovery in the market, the BSE introduced CA in place of CEOS in the opening session. The introduction of CA was mandatory based on the Securities and Exchange Board of India (SEBI) guidelines. In the second phase, on April 1, 2013, BSE had extended the CA process to all illiquid stocks listed on BSE based on the recommendations of the Secondary Market Advisory Committee (SMAC) and instructions of SEBI.

Applied Finance Journal, Call Auction (CA), National Stock Exchange of India (NSE), Bombay Stock Exchange (BSE), Continuous Electronic Order System (CEOS), The Pre-Open Call Auction Trading Mechanism, BSE Sensex Stocks.