Abstract:
The Indian financial system has been revolutionised by the application of a new market design:
continuous trading with an anonymous limit order book at NSE and BSE. However, in certain
situations, this market design has limitations. Call auctions represent an alternative strategy, where the
order flow over a certain time period is pooled, and the market-clearing price obtained through an
aggregated supply and demand curve. Call auctions trade off instantaneity of order execution in favour
of elimination of impact cost, and can achieve a more trusted price. They can improve the functioning of
the market on issues such as market opening, market close, extreme news events, and potentially for
illiquid securities including bonds. Call auctions could usefully replace some existing market rules such
as `circuit breakers\'. At the same time, there are many subtle elements in making a call auction market
work, which require care in market design.
