Market trading hour extension can reverse trade drain. Here’s why

The proposed move by the stock exchanges (SEs) to examine the feasibility of extending trade timings across stock market segments has kicked off a sort of debate among leading figures of the fraternity. Most of them have been too philosophical and have focussed more on the operational nitty-gritty. Some of them have even explained the purported health effects on the trading community that may arise due to additional time allocated in trading by the stock market participants.

The proposal to extend the trading timings, if implemented, may bring in tangible as well as intangible advantages. We will begin with discussing how this move may help in bolstering liquidity further in the Indian equity markets, particularly from Foreign Portfolio Players (FPIs).

Increased trading Inflows especially via Foreign Investors
The geographical location and the time zone we (India) fall into and most importantly, due to limited trading hours of Indian stock markets is proving a blessing in disguise to a jurisdiction like Singapore Stock Exchange (SGX). FPIs cover their bets taken in the Indian market with contra positions in SGX even if it’s a costlier affair for them.

Many foreign investors that take positions in the Indian market currently hedge their positions using the SGX, as it trades for extended hours. This doubles their cost of hedging as the next day, they also have to reverse their positions.

Also, when it’s working hours in many western countries, unfortunately due to the time difference, it’s evening and late evening in India, the markets are closed. Due to this, some may prefer to trade only in SGX as it’s opened for trading with extended trading hours and provides them an opportunity to settle their trade at ease.

Extended trade timings will not only reverse the trade-drain, increase the trading volume of the domestic bourses and provide comfort to the foreign players taking direct exposure in the Indian market.

Just have a look at a datapoint released by the National Stock Exchange of India (NSE) recently.

The daily average turnover of the cash market that peaked in April 2022 at Rs 73,220 crore has dipped by 69% to Rs 22,829 crore in January 2023.

Against this, the daily turnover of the options in the derivatives segment of the NSE has risen to Rs 1.55 crore crore in January 2023 from Rs 90 Lakh crore in February 2022.

This additional capital / trading inflow by FPIs may help revive the sagging turnover and add a lot more liquidity to the domestic markets.

Another perspective of looking at the issue of extended market hours is from the domestic investors and markets point of view.

Boon for many retail traders
How many times have you felt that as a banking consumer, banks should remain open on Sundays, so that you can visit the banks in your free time & not have to take a leave or a half day? Similar is the case with equity markets. Many retail investors would be attracted towards the capital markets who are currently not able to trade due to their existing work commitments.

Reduces anxiety & uncertainty
Anxiety has far-reaching effects on stock market trading. It’s not the actual occurrence of the event but the fear of the occurrence of the event that harms more. The day before the announcement of the company’s result is the worst day in terms of anxiousness for traders. Even the markets don’t like uncertainty and rewards certainty, even if it has a negative edge to it. Currently, for stock traders every night is the result night, as they don’t know how the domestic market is going to react to the events and the global market movements the next morning.

Thus, the extended trading hours will reduce this anxiety and uncertainty and the market participants could heave a sigh of relief.

At par with Commodity Markets
The reason why generally commodity markets have longer trading hours as the commodity markets are connected across the world. For that reason, even commodity futures have an extended trading time from 9 in the morning to 11:55 at night. In the current era, all the global economies are interconnected & the globalised market participants and liquidity affect most capital markets, including India, in a similar direction. To give an example a Fed rate change impacts the Indian markets more or less in the same direction as it impacts the Mother Market (US Market).

Cost benefit
There would be some operation hassle to implement the extended trading hours. Most of the brokers who provide access to the stock market are also participants of the commodity markets where they are already working till almost midnight. Thus, the additional operational cost will be incremental. However, the increased liquidity would definitely help each market participant be it retail traders, FIIs, brokers, exchanges etc. in the form of better opportunity to trade or increased revenue.

The downside
The major downside of the extended trading hours is that it will add to the already ballooning derivative turnover of the exchanges. This due to the fact that the exchanges are proposing to increase the cash segment timings up to 5 pm from the current 3:30 pm & the derivative segment up to 11:55 pm, in line with the Commodity Derivatives. Thus, most of the additional extended time, and hence the volume, will flow into futures and options. However, in order to avoid any issues with respect to price discovery and mis-pricing, it is advisable that both the segments –cash and derivatives—should have the same extended time lines of 11:55 pm.

*The author is Executive Director, SAMCO Securities.

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