Trading hours

Extended trading can improve hedging opportunities

The proposal by the National Stock Exchange (NSE) to extend trading hours for index derivatives has some obvious pros and cons. On the positive side, it would enable savvy traders to act immediately upon market-sensitive news and triggers that occur outside normal trading hours. However, it would impose extra operational costs on brokerages, and those may be difficult to recoup for smaller ones unless trading volumes pick up in the extended sessions. There could also be technically complex issues involved in reconciliation if indices are open for derivatives trading but their constituent underlying stocks (and stock derivatives) are not. On the whole, the Securities and Exchange Board of India (Sebi) has displayed caution by consulting a broad spectrum of stakeholders before coming to a decision.

The NSE is considering an extension of trading hours in index derivatives until 9 pm and beyond in at least two phases. The Indian commodities exchanges (which offer futures on various commodities) already trade until 10 pm, and the Gujarat International Finance Tec-City (GIFT), which offers dollar-denominated derivatives based on the underlying Nifty, is open for 22 hours out of 24. Several prominent overseas exchanges are also open in the evening for trading in index derivatives. So this time extension would be aligned to global practices. Price-sensitive events can occur at any hour and keeping the exchanges open for longer periods can substantially increase trading opportunities and, arguably, reduce volatility and jerkiness. For example, the Ukraine war, or the Hamas terrorist attacks, or the announcement of lockdown occurred at times when the Indian exchanges were shut and, as a result, the index opened sharply lower in the next session on each occasion. This led to significant losses for traders who had open long positions. Keeping the exchanges open for longer sessions would make it possible for traders to immediately act upon breaking news and, thus, either limit losses or generate profits by taking appropriate positions.

While it is technically feasible for Indian traders to utilise the GIFT, it involves strict trading limits. The remittance rules also come into play for individuals. This makes it difficult to adequately hedge large rupee-denominated positions since the GIFT has dollar-denominated contracts. It is also common practice abroad for index derivatives to be available for trading for much longer daily sessions than their underlying constituents. Sorting out reconciliation on big “swing” days is therefore common practice, with exchanges having evolved transparent ways to reconcile equity prices in subsequent sessions if the index traded with a big swing while the equity market was shut. Hence, it should not be difficult for the NSE to evolve such procedures.

However, the cost factor is a significant barrier. Brokerages work on wafer-thin margins. Extended hours would lead to higher costs due to the need to deploy more manpower (or pay overtime), create tighter back-office processes, and ramp up tech and system capabilities. These costs might outweigh potentially higher revenues in the short run. As a result, smaller brokerages are likely to struggle whereas large discount brokerages could pick up market share. Therefore, Sebi intends to gather feedback from a wide array of stakeholders before it comes to a decision about extended trading hours, which is the right approach. It will enable the regulator to address concerns while making the transition at an appropriate time.