The Hindu Business Line : Will new trading hours help investors?

The recent move by the Securities and Exchange Board of India (SEBI) to allow stock exchanges to extend trading by two-and-a-half hours from 9 am to 5 pm has elicited groans from some quarters and applause from others. Though the move is not adequate to address the issues raised by SEBI’s discussion paper on this subject, it will be beneficial to the investor community.

The primary reason for increasing the trading hours, cited by SEBI in its discussion paper, was to allow domestic stock prices to assimilate information flow originating in other countries and to adjust accordingly.

The current market hours on the bourses, from 10 am to 3.30 pm, already straddle trading hours in some Asian and European exchanges. Increasing the trading session by one hour in the morning and by an hour and a half in the afternoon does not materially enhance this overlap.

It is also an established fact that the movement of the US equity market and the economic data emanating out of US are the prime movers of global equity prices.

The proposed market close of 5 pm is still at least two and half hours before the opening of the US stock exchanges, giving stocks on Indian exchanges little opportunity to adjust to developments taking place in US.

Competition

The other argument in the discussion paper pertains to increased competition among international exchanges and allowing participants to execute trades in India that would otherwise have been executed overseas.

The allusion here is clearly to trading of Nifty futures on the Singapore Stock Exchange (SGX Nifty). Trading volumes in these instruments saw a spike following the restrictions imposed on overseas derivative instruments (ODI), or participatory notes, in October 2007 in India. But the fact that volumes in SGX Nifty increased manifold after the ODI restriction shows that the trading is mainly driven by entities that do not wish to register with the Indian regulators.

It is difficult to perceive how increasing market timings will make such entities shift their trading to domestic exchanges.

What is more, volumes in the SGX Nifty have seen a sharp decline since the middle of 2008 as hedge funds faced severe redemption pressures and had to cut back on their activity or close it altogether.

The monthly volume in October 2009 was only 42 per cent of its peak volume. SGX Nifty can hardly be termed a threat to domestic exchanges. Also, the new market timings do not span the entire trading duration of the SGX Nifty.

The plus points

The proposed increase in trading sessions is, however, not an entire wash-out and does have some beneficial facets for investors and traders. Investor wishing to buy or sell a stock on any day will get additional time to do so with more price points. Longer session would lead to reduced stress levels and could throw up more lucrative prices as the session progresses.

The longer hours and greater overlap with Asian and European markets would allow Indian stock prices to react to news flow from these countries to some extent in the extended time, leading to lower volatility.

The exchanges and the broking community stand to benefit from this measure as day-trading volumes can be expected to go up, with longer trading hours.

A day-trader who has squared off one trade would be tempted to initiate another trade if the sessions were longer. Since it is the traders who contribute to liquidity on the bourses, this would give a fillip to liquidity on the bourses, leading to better price discovery.

Much talk has ensued about intermediaries being displeased with this move. But since many of them already offer commodity trading platforms that extend up to 11.30 at night, not too many adjustments will be needed on this front.

Serious traders who trade 24x5 in the foreign exchange market, commodity market and so on, may even be puzzled by the debate on this minor tweaking.

Though the increase in market timings is a step in the right direction, it is inadequate as it does not give Indian equities the window to assimilate information flow from the US — a key global market driver.

SEBI could have left the cash market timings as they are now, from 10 am to 3.30 pm, but increased derivative trading hours up to 11.30 pm to coincide with commodity market timings.

As trading is an optional activity for most, traders could restrict trading hours according to their convenience. Giving a break of an hour is also an option that the regulator can consider.

The inordinate delay between publishing the discussion paper and giving the order for implementing the change, and not making the responses to the discussion paper available to public are other issues the regulator needs to address.