What are Periodic Call Auctions and Why are Some Stocks Traded Using This Mechanism?

Periodic call Auction is a unique trading mechanism introduced by SEBI in 2013 to bring more structure and control to the trading of typically illiquid small-cap stocks on Indian Stock exchanges. When we put an order for stocks in this category in Zerodha, it shows "this stock is traded in periodic call auction for illiquid securities." It will also show "Stock is a trade to trade category stock. Intraday trades are not allowed". When we buy stocks in surveillance measure, we should analyse the risk associated with that trade carefully before proceeding. Sometimes we may get trapped in these illiquid stocks.

Traders often encounter difficulty buying and selling illiquid or thinly-traded stocks. For instance, one of our reader contacted me yesterday and said he saw the message on her brokerage account that the stock is "traded in periodic call auction for illiquid securities. You can place your orders after 9:30 AM in the next trading session." This meant the stock was so infrequently traded that the exchange was batching orders to improve price discovery and liquidity. Similarly, the message "stock is a trade to trade category stock. Intraday trades are not allowed" also popped up. Here, the exchange wasn't permitting short term trading in this security due to low daily volumes. Lastly, when purchasing another stock, He was alerted that the "stock is under surveillance measure (ESM Stage 2). Please analyse the risks carefully before proceeding." Evidently the exchange found unusual trading and wanted her to confirm the buy. While inconvenient, these measures aim to protect investors in stocks lacking adequate liquidity.

First and foremost, my advice is to always avoid trading in illiquid penny stocks. Such stocks can be easily manipulated and investors may find themselves trapped in positions they cannot exit.

This is not limited to zerodha only. In other brokers, you may not see this detailed description error message. But you won't be able to sell them in other than time duration I mentioned below. They may simply show "order rejected".

What Triggers a Stock to be Moved to the Periodic Call Auction List?

SEBI has set out specific liquidity-based criteria that determine if a stock should be moved to the periodic call auction mechanism:

• Average daily number of trades over the last quarter is less than 50
• Average daily trading volume over the last quarter is less than 10,000 shares
• The stock has a market capitalization of less than Rs 10 crores

Essentially, stocks that display extreme illiquidity in terms of low trading volumes and values get tagged as periodic call auction stocks by the exchanges. This tagging exercise happens every quarter.

Once tagged, these stocks exit the normal continuous trading mechanism and start trading only via periodic call auctions.

Defining Illiquidity: Criteria for Classifying Illiquid Stocks in India

An equity scrip will be categorized as illiquid on a stock exchange if:

1. Its average daily trading turnover is less than Rs. 2 lakhs calculated over the previous two quarters.

2. It is classified as illiquid on all stock exchanges where it trades.

However, scrips satisfying the below conditions will NOT be deemed illiquid:

1. Stocks with over Rs. 10 crore average market capitalization

2. Stocks paying dividends in at least two out of the past three years

3. Stocks where the company was profitable in two out of the last three years + promoters' pledged shares less than 20% in latest quarter + book value over three times the face value

In summary - scrips face illiquidity classification if trading below Rs.2 lakhs average daily turnover on an exchange over 2 quarters and illiquid status applies across all exchanges where listed. But exclusion conditions apply based on market cap, consistent dividend payouts and profitable operations.

How Does the Periodic Call Auction Trading Mechanism Work?

Under periodic call auctions, trading sessions are structured and timed across the trading day at pre-determined intervals.

There are six one-hour auction sessions, with each session split into a 45 minute order placement window and a 15 minute order matching window:

• Order Placement: From the start of each one-hour session, participants can place, modify or cancel auction orders for 45 minutes
• Order Matching: In the last 15 minutes, the exchange tries to match the buy and sell orders entered earlier and confirm trades
• Buffer Time: A 7 minute buffer period is provided before the next one-hour session starts

For example, the first periodic call auction session would work as:

• 09:30 AM to 10:15 AM - Orders can be entered, changed or cancelled
• 10:15 AM to 10:23 AM - Order matching happens and trades are confirmed
• 10:24 AM to 10:30 AM - Buffer period before next session

And this cycle repeats across the trading day with 6 timed sessions in total.

I have given the session timings in table given below.

Key Benefits of Periodic Call Auction Mechanism

The periodic call auction mechanism provides two major benefits:

1. Structured Trading Environment

The timed sessions create discrete windows for order entry and execution, ensuring strict order matching and pricing discipline. This results in minimal pricing errors and outliers.

It allows equal opportunity to all market participants to place orders, unlike continuous trading where prices often move very rapidly.

Overall, periodic call auctions promote fairness and transparency even for illiquid stocks.

2. Controlled Volatility

By batching all orders and matching them simultaneously inside a session, excessive intra-day price fluctuations are avoided.

Illiquid stocks in general tend to be more volatile. But periodic call auctions provide a volatility 'circuit breaker' by enabling controlled trading at timed intervals.

This protects against adverse events like erroneous large trades that can disproportionately impact illiquid stocks under normal market conditions.

How to Trade Stocks Under Periodic Call Auction?

Trading stocks that are placed under periodic call auction requires understanding the session timing and order mechanics:

• Placing Orders: Unlike regular market orders, auction orders can be entered only during the 45 minute order placement window of each session. These include auction limit orders similar to normal limit orders.
• Order Matching: Buy and sell orders matched during the last 15 minute order matching window get traded at the auction price for that session. Full/partial order matching is possible based on order quantities.
• Unmatched Orders: Orders not matched in one session are moved to subsequent sessions for matching on the same trading day.
• Session Timings: As outlined earlier, there are 6 one-hour periodic call auction sessions everyday from 09:30 AM onwards. Orders can be placed in multiple sessions based on trading strategy.

It is important to note that Immediate or Cancel (IOC) order and Good Till Time (GTT) order facilities are NOT available for stocks under periodic call auction. Only regular limit orders are allowed.

In a nutshell, periodic call auction mechanics enforce a structured trading approach through limited order placement windows and scheduled order matching - which is aligned to the liquidity realities of small illiquid stocks.

Frequently Asked Questions

Q: How long can a stock remain under periodic call auction?

SEBI norms mandate periodic review of liquidity thresholds. Stocks can exit periodic call auction anytime their liquidity improves sustainably over a quarter. Typically, stocks remain under this mechanism for multiple quarters given their high illiquidity.

Q: Is periodic call auction mechanism applicable to all stocks trading below Rs 10 crores market cap?

No, market cap alone is not the trigger. As highlighted earlier, SEBI guidelines outline twin liquidity criteria to identify stocks for periodic call auctions:

1. Average daily number of trades below 50
2. Average daily volume below 10,000 shares

Only stocks fulfilling both trade count AND volume thresholds are classified under periodic call auctions provided their market cap is less than Rs 10 crores.

Q: Can all normal order types be used for periodic call auction stocks?

No. Unlike regular stocks, only limit orders are allowed under periodic call auctions. Complex orders like stop-loss or bracket orders cannot be placed. This is because order validation happens only at discrete intervals i.e. during matching at the end of auction sessions.