Last week, the Securities and Exchange Board of India (Sebi) proposed extending trading hours so that Indian markets are more aligned with international financial markets.
At face value, this is a welcome, well-intentioned, move: Indian markets should become more compatible with other financial hubs from North America to Singapore. Markets are increasingly interconnected, and financial capital must be able to easily traverse borders—across nation-states and time zones.
The problem is that, as is, extending trading hours won’t accomplish much. India’s trading infrastructure—banking and clearing systems —cannot accommodate extended hours currently. While Indian cash and equity derivative markets are open for less than 6 hours a day, extending market timings past 3.30pm. won’t matter if the banks that clear the transactions are closed anyway.
Liquidity is important for financial markets, but other hindrances—besides trading hours—stand prominently in the way. Currently, bank transactions in India are often conducted by cheque as opposed to electronically; payments, therefore, are often not settled in real time for many market transactions.
To be sure, Sebi is right when it points out that the overlap in trading hours—say with Singapore by a few hours —is good. And that while some Indian markets are open for less than 6 hours a day, other foreign futures markets are open 23 hours a day.
But Sebi must simultaneously focus on renovating the market structure. This means that India needs market makers, which increase liquidity. Clearing and banking systems need to operate at the push of a button. Simultaneously, transaction costs must stay low to encourage liquidity and to prevent futures trading from shifting to other markets. If trading hours are extended without ramping up the infrastructure that clears such transactions, trading costs could soar—this would hinder liquidity and defeat the purpose of extending hours in the first place.
In a world of a 24-hour news cycle and cross-border investment, extending trading hours in India is a good move. But it cannot be pursued without other reforms that will foster true liquidity.
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