Mumbai: Fifteen years after the launch of screen-based trading, the stock market is getting ready for another extension in trading hours, following a proposal by the capital market regulator, the Securities and Exchange Board of India.
While brokers are sceptical about the benefits of the move, the timing variance with the banking system, which opens later and closes earlier, may lead to hitches, market operators say.
“In the early 90s, the market used to be open between 12 noon and 2.30pm. But when it was extended to 10-3.30(pm), few people complained as it was manageable. This extension to 9-5 is likely to make the lives of the brokers difficult,” said K.R. Choksey, chairman of KR Choksey Shares and Securities Pvt. Ltd, associated with the stock markets for five decades.
Tough call: Stockbrokers at their terminals during the Diwali special trading session at the Bombay Stock Exchange on 17 October. Punit Paranjpe / Reuters
While the benefits of an extension are not tangible at this stage, the potential pressure on the workforce seems daunting.
“In a city like Mumbai, even for a 10am opening, people have to start from their homes at 8 and by the time they close and reach home it’s 7 in the evening,” Choksey said. “The extension means we have to start two shifts. In these days of low brokerage, that can prove to be a death blow.”
The extension would also lead to longer hours at post-trade processing units such as the custodian banks and back offices of brokerages.
“We will have to work in shifts,” said Raghuvir Mukherji, a senior official with a Mumbai-based custodian arm of an overseas bank.
In case of foreign institutional investors (FIIs), custodians need to “match electronic contract notes of brokers with client instructions”, he said. “This activity usually happens after market closing. With the late close and increased volumes, this activity might take much longer.”
Under the open outcry system, where traders shouted and signalled each other to exchange share prices and seal trades, the market was open for less than three hours between noon and 2.30pm. Total trades were just about Rs300 crore per day but brokerages were as high as 1.5-2%.
Today, while brokerages have shrunk drastically to less than 25 paise, volumes have zoomed to around Rs1 trillion per day.
One of the major arguments laid out in the Sebi discussion paper is that the extension will help align India with global markets for better price discovery. But the current extension proposal doesn’t chime with the US markets (which run from about 7pm to 2.30am IST), which have maximum impact on domestic movement, nor the Singapore or Dubai bourses, which trade Nifty derivatives.
“The extension was sought long ago as people wanted to minimize the impact of US markets,” said R. Balakrishnan, Chennai-based investment adviser. “But despite this extension, we still don’t get into the US trading window. So, we will still have an abrupt impact due to US market moves. Moreover, I am not sure if volumes would go up. But it will create a lot of troubles in the back office.”
The scope to attract volumes from Singapore’s SGX and Dubai may be limited.
“The SGX trading starts at 6.30am (IST) and you are still delayed by a full two-and-a-half hours. It’s not going to make any difference,” said Choksey.
Besides scepticism over human resources and the profitability of brokers, there are also concerns that the extensions would introduce “middle overs” into the market, where trading becomes lacklustre.
“The only change that we will see is the morning turnover will shift to around 9.30am from 10.30am at present, and the evening turnover will shift from 3pm to 4.30pm,” said V.K. Sharma, head of research, Anagram Stock Broking Ltd. “The afternoon session is likely to be lean. This will not help in increasing the overall turnover in cash segment.”
Sanjay Gupta, managing director, OPG Securities Pvt. Ltd, agreed with Sharma.
“The afternoon session is likely to be lean. This will not help in increasing the overall turnover in cash segment,” he said. “The volumes will not go up any time soon. Within any given trading hours, the volumes shoot (up) only when there is an important international development. The move is aimed only to help bring in the SGX-Nifty futures turnover from Singapore to India to some extent.”
There could be operational issues arising out of inconsistencies in timings with the banking system. RTGS, short for Real Time Gross Settlement, is a centralized system in which inter-bank payment instructions are settled immediately and irrevocably. The system operated by the Reserve Bank of India functions between 10am and 4pm.
The various trades of institutions and individual traders are aggregated at the end of the day.
After netting off sales and purchases of various securities at the present close of 3.30pm, any shortfall can be met by the investors by moving additional money through the RTGS.
But with a 5pm close, any shortfall needs to be met with the margins deposited by the brokers with the clearing houses.
“There could be some banking issues in DVP (delivery versus payment) transactions that happen at 3.30, just before the market closes,” Balakrishnan said. “Now these transactions go smoothly as the banking system is open. But if it’s extended to 5, then these settlements would become difficult.”
The RTGS timing is an issue, Mukherji said.
“For FIIs, who use a single bank and trade through custodians, there will not be major changes in working style,” he said. “But for domestic institutions that might have multiple banking relationships, this could create problems as inter-bank money transfers would not be possible in non-RTGS hours.”
To overcome this, clients will have to anticipate the amount of trades and pre-fund them by bringing in additional margins, he said.
Manish Sonthalia, portfolio manager, Motilal Oswal Financial Services Ltd, said the margin requirements of brokers will increase.
“The overall margin is a function of the client’s exposure margin and the open interest margin,” he said. “There may not be any impact on the open interest margin, but the exposure margins will go up.”
The move will help in enhancing the incomes of the exchanges, as turnover tax and the securities transaction tax will go up with volumes, Sonthalia added.
An official at ICICI Securities Ltd said that extended trading hours may call for client level margining.
At present, brokers are required to maintain 30-35% margin with exchanges for commodities trading, 30% margin for the cash segment, and about 15% for Nifty futures.
“If the markets are anticipated to move sharply in either direction, the brokers will be required to maintain higher margins to execute any large order.” he said. “With extended trading hours, this possibility is even higher, and so the brokers may be required to collect margin money from their institutional clients in the cash segment.”