Closing bell

Extended trading hours will have risks

The National Stock Exchange’s (NSE’s) plan to extend trading hours across the equity and, probably, the equity derivatives segments will have pros and cons. On the one hand, there is a strong case for keeping the markets open as long as possible. On the other hand, extended trading hours would have higher compliance costs. The NSE has permission to run the equity-based derivatives segment from 9 am to 11.55 pm (although in practice the session is open from 9.15 am to 3.30 pm, with trade modifications allowed until 4.15 pm) and to keep the equity cash segment open from 9 am to 5 pm, though this segment is normally open from 9.15 am till 3.30 pm, with order entries from 9 am onwards. The commodities derivatives exchanges are open from 9 am to 11.55 pm, while the currency markets are open from 9 am to 5 pm. Trading time in interest-rate derivatives has been extended till 5 pm.

In a recent management interaction, the chief executive officer of the NSE indicated the exchange was considering extending the equity trade timings to 5 pm, which would in turn imply extending the timings of the equity derivatives segment. Theoretically, it would be ideal if the financial markets stayed open 24x7. That would allow traders to instantly respond to any price-sensitive event or news flow. Assuming efficient information dissemination and good trading processes, “always-open” markets would lead to smoother discounting of news, and lower price volatility. In practical terms, however, 24x7 is impossible. But the commodity derivatives exchanges (the NSE and MCX) have smoothly handled 15-hour sessions for many years. So extending timings well beyond the current durations in equities, and equity derivatives, is certainly possible. Given the regulator’s decision to move to T+1 settlements, extended timings could aid foreign investors since it would compensate to some extent for time-zone differences.
 

Obviously longer trading sessions would put pressure on NSE members to build better back-office systems and probably to hire larger teams and invest in improved digital solutions. Those extra costs would have to be balanced against potentially higher trading volumes. There is also the behavioural aspect of longer trading hours to consider. Participation in the commodities and bond markets is overwhelmingly institutional. But millions of retail investors directly take positions in the equity and equity F&O (futures and options) segments. Many are day-traders who work on margin. Most such traders lose money. A recent Securities and Exchange Board of India report indicated that 90 per cent of individual traders in equity derivatives suffered losses. This was based on a sample of all individual clients of the top 10 stock brokers. An earlier report indicated the ratio of nine retail losers to every winner was similar in the equity cash markets. One of the reasons for this skew is that disciplined trading is required to handle highly leveraged positions. Most individuals trade more often than they should, and they take larger positions than is prudent.
 

There is a possibility that extended trading hours will lead to more such high-risk behaviour and cause more fatigue resulting in sub-optimal decisions and, therefore, leading to larger losses for retail investors. While trading is a zero-sum game, in the longer run it could mean many retail traders being forced out of the market. That in turn could affect trading volumes and drive up impact costs. This is a potential risk.