*** This is a rather advanced topic. It is not recommended for people who are new to investments or trading

When a stock closes the previous day at $1, ever wondered who decides that the stock should open at $1 today? Or even 99cents for that matter. In 2 words, supply and demand.

The singapore stock market is open from 9am to 5pm, with no trading during lunch hours at 12.30pm to 2pm.

However, the computer system at SGX actually start to take orders at 8.30am onwards. When that happens, the computers of the individual brokerage firms will send in all the orders they collected the night before, as well as any fresh orders that come in from 8.30am to 8.59am. At 8.59am, the pre-opening matching routine is performed. And based on those orders, the opening price is determined.

Simple? Nah, actually not really.

Assuming that it looks like the following at 8.59am :

How the routine works is that the priority is by price then by volume. Of course, basic economic logic such that, when the buyer price is higher or equal to the seller price then a transaction will be made.

So the way to look at it is to ask the question, "What is the largest amount of volume that can be done before the buyer price is lower than the seller price."

Going through step by step, you add up the volumes

        1,000 to buy at 1.20 or higher            5,000 to sell at 1.03 or lower
        6,000 to buy at 1.15 or higher          25,000 to sell at 1.05 or lower
      36,000 to buy at 1.14 or higher        525,000 to sell at 1.06 or lower
    186,000 to buy at 1.12 or higher        784,000 to sell at 1.07 or lower
    793,000 to buy at 1.08 or higher     1,099,000 to sell at 1.08 or lower
1,538,000 to buy at 1.07 or higher     

At this point theres just one thing to note. When its mentioned 1.15 or higher, it means that the person is willing to pay $1.15 for it, because he is already willing to pay $1.20 for it. So if it turns out that he can get it at $1.15, then he would generally be happier.

Now, this is the confusing part. Does the transaction deal at 1.07 or 1.08?

Lets assume it deals at 1.07. What this means is that all the buyers at 1.08 or higher will get their deals done first, and that the sellers at 1.07 or lower are all taken out. It also means that the sellers at 1.08 are not touched at all. Not even one lot. So the end scenario of such a situation is either 1.06 or 1.07 at the buyers queue, and exactly 315,000 at the sellers queue with the price being 1.08 or unknown amount at 1.07 at the sellers queue.

in this case, there is 793,000 buyers at 1.08, and 784,000 sellers at 1.07. These will offset each other firstly. Thus leaving 9,000 buyers at 1.08 and no more sellers at prices lower than or equal to 1.07. However, that doesn't fulfil our condition as there are still buyers at 1.08. Therefore, these buyers are fulfilled by the 1.08 sellers, and because of that, the entire batch is taken to be done at 1.08, instead of 1.07.

As a result, the final queue sizes are
745,000 buyers at 1.07 and 306,000 sellers at 1.08
And thus, the opening price will be 1.08

Now, if  you thought that was a serious waste of brainpower and time, imagine having to do that for 5 stocks in your watchlist, using super quick mental calculations on numbers that are constantly changing. Half the investment community would go mad before 9am!

Fortunately, certain programs, such as poems protrader provides the built-in ability to calculate the pre match price as well as the volume matched instaneously.

Another point to add is that this matching routine is also performed at 1.59pm as well at 5.06pm.

To cut it short, while most of you will not bother about the calculation above, know that there are professionals out there who are constantly cracking their heads to get that one small edge over you!

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