There is a near-consensus among market participants that extending trading hours at stock exchanges would impose an unnecessary burden on the system, with no benefit to speak of. Brokers, day traders, mutual funds and foreign investors have reacted adversely to the move, which they say will put back-office operations under stress and lengthen the working day for many professionals to intolerable levels.
Who benefits from the move? According to a news report, business news channels would gain by selling more advertising space, since viewership is the highest during trading hours. But television channels couldn’t have been the focus of this regulatory change.
Also Read Mobis Philipose’s earlier columns
According to one discontented broker, the decision on extending trading hours has been taken primarily at the request of the National Stock Exchange of India Ltd (NSE). About a year ago, NSE had approached market regulator Securities and Exchange Board of India (Sebi) on this, according to news reports. The idea was to capture market share from Singapore Exchange Ltd (SGX), where volumes on Nifty futures had soared after the ban on participatory notes. Volumes have fallen considerably, however, since a ban on participatory notes was reversed.
SGX’s Nifty futures turnover is only around 6% of NSE’s Nifty futures volumes in value terms. Most of the volumes on SGX are related to regulatory and cost differences, and advancing trading hours may not help in capturing share. In any case, SGX opens at 6.30am India time, whereas trading hours can be advanced only to 9am, according to the Sebi circular. So this doesn’t seem like a good enough reason to change market timings either.
Going by the reaction of market participants, it looks like a premature move. Having said that, in a globalized world, where news flow in any part of the world can impact stock prices in India, there is also a strong case to extend trading hours. It would be good for investors to be able to trade Indian equities when all major markets are open. Currently, this is possible with Asian and European markets, but Indian exchanges close for trading well before American markets open and resume trading long after American markets close. Sebi’s suggestion that trading can be extended till 5pm doesn’t achieve this objective either, since American markers open around 7pm.
But if this is the primary objective of extending trading hours—that investors can trade when news breaks, rather than wait about 18 hours for markets to open—then how can it be achieved without stressing market participants? There could be lessons for Indian policymakers on how settlement is done in exchanges such as the Chicago Mercantile Exchange (CME), which are open for trading for over 23 hours a day for a few products. CME, the world’s largest exchange, splits a day into two trading sessions. One that runs between 8.30am and 3.15pm and the next sessions starts at 3.30pm and runs till 8.15am. Phew!
When does one do all the back-office processing work, which is one of the concerns expressed by market participants in India? The policy that’s followed is that the trades in the second session are settled only the next day. So only trades done in the first session and in the previous day’s second session need to be processed and settled. Back-office personnel, therefore, have ample time within normal working hours to work at the settlements.
Of course, policies on margining and other risk management procedures may have to be looked into, but these are not insurmountable issues. Splitting the settlement cycle in this fashion could be a good solution to extend trading hours without creating the headache of putting back-office operations under stress. Extending trading hours needn’t necessarily result in extending the settlement cycle.
The Economic Times reported recently that Sebi is considering a pre-opening session for the stock markets. This will be a good move since it can considerably reduce market volatility during the opening minutes of trading.
In a pre-opening session, a call auction process is normally used to determine the opening price of a stock. A call auction is a process where limit orders are collected for a fixed period and the price that enables the largest number of orders to be executed is chosen.
The current system of trading, where all orders come into the system when the market opens, works superbly when there’s a healthy order flow. But in abnormal cases, when major selling is expected, buy orders would be hard to come by in the early part of the trading day, leading to a sharp drop in prices. In the past, this has even led to a halt in trading. A call auction that only takes limit orders is a good way to establish a consensus opening price for securities.
Amid all the brickbats related to the move to extend trading hours, this decision would come as a welcome relief.
In The Money runs every other Tuesday. Comments are welcome at inthemoney@ livemint.com