There are times when a stock lists at different prices across exchanges after an IPO. A minimal price difference of say a percent or two may not have the potential to cause much disruption.
But what if the price difference is huge, say more than 10-20%? Arbitrage players will have a field day but the scenario won’t be ideal for most retail investors. SEBI recently published a circular to deal with such a scenario.
The main highlight of the circular is the calculation of a Common Equilibrium Price (CEP) if there’s a substantial disparity between the listing price across exchanges on the first day.
What is the Common Equilibrium Price?
An Equilibrium Price (EP) is what you see on an exchange when a stock lists for the first time. At times, the EP may be different for different exchanges. If the EP is substantially different in percentage terms, then a Common Equilibrium Price (CEP) will come into the picture.
CEP will be calculated by the trading systems of exchanges. This will ensure that investors don’t experience a discrepancy between the listing prices.
How will the CEP be calculated?
CEP will be calculated based on the Volume Weighted Average Price (VWAP) of the EPs of exchanges derived from the Call Auction. A simple way to understand this would be through an example.
Let’s say there are two exchanges with the following listing data:
- EP A: Rs. 190
- Volume A: 200
- Lowest Bid/Ask Price: Rs. 180
- Highest Bid/Ask Price: Rs. 210
- EP B: Rs. 210
- Volume B: 300
- Lowest Bid/Ask Price: Rs. 200
- Highest Bid/Ask Price: Rs. 220
The price band is 5%. But the difference in EPs across exchanges is 10.52%. Thus, the CEP will be calculated in the following manner:
(190 x 200 + 210 x 300)/(200+300) = Rs. 202
The formula is thus:
CEP = (EP A x Volume A + EP B x Volume B)/(Volume A + Volume B)
Along with CEP, the circular mentions two more things:
- Call Auctions will be conducted separately across exchanges
- Pending orders from said Call Auctions that fall in the CEP band will be carried forward to the normal market
The introduction of CEP will play a part in normalizing the price difference between IPO listings on NSE and BSE. We recently launched SME IPOs on Dhan, which will remain unaffected by the introduction of CEP. SME IPOs, as you may know, only list on one exchange.
Jay Prakash Gupta