Extended market benefits

Longer trading hours to help investors respond better to global events

The National Stock Exchange (NSE) has asked markets regulator, the Securities and Exchange Board of India (Sebi), for permission to extend trading hours for derivatives till 9 pm, and eventually, perhaps, 11.55 pm. It should be noted that the NSE is likely to get the permission, as Sebi has already cleared the concept of extending trading hours till 11.55 pm for derivatives and 5 pm for equities. This should be welcomed, even as it may impose additional costs on brokerages and the exchange.

The rationale behind extended trading hours, apart from possible trading volume gains, is that this would enable Indian traders and investors to respond in real time to price-sensitive events in Europe and America after the normal trading session closes at 3:30 pm. Extended hours will also make the NSE more competitive vis-à-vis rival platforms like the Gujarat International Finance Tec-City (GIFT), where trading takes place around the clock. In the initial stages, the NSE proposes to offer trading in index options and futures contracts only against the underlying Nifty and Bank Nifty. It might later look at offering more contracts, such as single-stock options and futures, and perhaps even currency derivatives.

Until a few months ago, if price-sensitive events occurred in the evening, traders and investors using rupee-denominated instruments tracked Singapore’s Nifty derivatives to get a sense of how the Indian market would move. That contract is now available on the GIFT, but it is still forex-denominated. The rupee-denominated Nifty often opens on the NSE with a gap in such circumstances, which means overnight positions can incur huge losses.

In principle, extended trading hours allow traders and investors to hedge events in the US and Europe in rupee-denominated positions in real time for a longer period. Also, in principle, such events can usually be adequately hedged by derivatives positions taken in the broad market index (Nifty), or in the financial index (Bank Nifty). An offering of currency derivatives would also be useful of course, since the rupee experiences volatility when, for example, the Federal Reserve or the European Central Bank announces monetary policy changes. The GIFT also scores in this regard as forex-denominated contracts automatically discount currency impact.

There, however, would be considerable practical problems in launching trading across extended hours, and some teething issues. The NSE itself and its employees will have to work longer hours, and tighter reconciliation mechanisms might be needed. The NSE may also have to consider changes in margining requirements and processes. While margining could even come down with extended trading hours, the processes would need an overhaul to guarantee more efficiency. All this implies that overheads pertaining to employees and servers, and so on, would likely increase. Every brokerage that offers derivative contracts will also have to cater to longer hours and budget for higher overheads. Ditto for financial institutions that need to hedge events occurring in the evening session. Until such time as higher trading volumes begin to compensate for the overheads, all stakeholders will have to carry these extra costs. However, the GIFT is 24x7 without apparent issues. Moreover, commodity futures markets stay open till late evening and brokers offer clients the option to trade there, so these are not insurmountable problems. Once stakeholders adapt, this should be an improvement.