In the early nineties when winds of liberalisation were blowing through the country, stock market trading took place in a large hall with jobbers and sub-brokers trying to out-shout each other in the stock market ring. Trading was done between 12 p.m. and 2.30 p.m. then; it’s doubtful if the energetic yelling, gesturing, and scampering could have lasted longer hours.
With the advent of screen-based trading, when trading hours were extended from 9.15 a.m. to 3.30 p.m., many found it a luxury, and some thought it could get boring. But now, there are talks of extending trading in equity derivatives until midnight.
It was recently reported that NSE, the world’s largest derivative exchange, is seeking permission from SEBI to hold an evening session from 6 p.m. to 9 p.m., for stock index futures and options. If market participants respond with enthusiasm to this session, then the trading could be extended until 11.55 p.m., with stock derivatives included.
The evening session may make it easier for people with 9 to 6 jobs to trade after work. But is it good to encourage equity f&o trading further among retail investors? Typically, longer trading hours are needed only in markets which trade the same asset such as bullion, commodities and forex across regions. Long hours for equity are unnecessary. While it is argued that the evening session can prevent large gaps on opening, data shows that Indian markets mostly open close to the previous day’s close.
Market trading hours
If we look at the trading hours of the largest stock markets across the US, Europe, Africa and Asia, the timing for equity trading is typically between 9 a.m. and 5 p.m. Many stock markets also include a lunch break, when traders can unwind.
But most commodity, bullion and forex platforms trade longer hours. This is because the same asset is being traded almost 24 hours a day, in different windows, across the world. For instance, gold or its derivatives can be bought in the same form, in either Asia, Europe or US stock markets, depending on when you want to execute the trade. Similarly, currency pairs may be traded in any market across the world; but the currency pair remains the same.
But in stock markets, mainly domestic stocks and stock indices are traded in each country. Overlapping trade timing with markets of other countries can therefore not help much.
The exceptions are highly popular indices such as the Dow Jones or S&P 500 which are traded across the world and hence their derivatives are traded 24 hours on some exchanges.
Reaction to news
One argument being forwarded for extending trading hours in India is that traders will then be able to react to news from the Europe and US. The reaction will be assimilated in the stock prices, preventing large gap-up or gap-down opening the next trading day. This argument, however, appears specious.
businessline analysis of the difference between the closing value of the Nifty 50 and next day’s opening value, from January 1, 2023, to October 10, 2023, shows that the average overnight change is just 0.12 per cent.
Only in eight out of 100 days, the difference in opening value is more than 0.5 per cent of the closing value. In other words, stock prices seldom open with sharp variance from the previous day’s close in Indian stock market.
While large gaps are possible in extraordinary events such as the Covid-19 outbreak or the Russia-Ukraine war, such events are not commonplace. There is no need for investors to stay awake late into night staring at their screens, awaiting such events.
What do investors and traders think about longer trading hours? We conducted a poll on X (formerly twitter) to find out if people would like to trade until midnight if trading hours are extended. Of the people who participated in the poll, 64 per cent said they will not want to trade equity f&o till late in the night. These people wanted better work-life balance and suggested reducing market hours futher from current levels, having much longer settlement cycles to curb speculation in market and so on.
But around 26 per cent said that they will trade in the evening session. The remaining 10 per cent were undecided whether they will want to trade in the night or not. The responses show that there is a demand from around a third of market participants for evening session in equity f&o trading. These could be the young work force who were playing the markets during the Covid-induced work from home leeway. These people may be able to trade in the evening once they return home.
But the trading in this session will only be in Nifty 50, bank nifty and other index futures and options. Even if 200 other stock futures and options are allowed to be traded in the evening session, it is doubtful how this will help in ‘capital raising’ or ‘development of capital market’, as some are claiming.
The flip side is that the multitudes who were active in online gaming could shift to equity futures and options, viewing this as an equally exciting and adrenaline pumping activity. The regulator needs to decide if this is desirable, especially when its finding show that 89 per cent of traders lose money in derivative trading and number of retail investors now account for almost 27 per cent of equity f&o turnover.
Longer hours in GIFT IFSC
The stock market regulator has given permission to exchanges to set their trading hours for equity derivatives anytime between 9 a.m. and 11.55 p.m. through a circular issued in 2018. Exchanges however have to seek permission from SEBI before implementing this, showing to SEBI that all the processes, risk management, surveillance etc are watertight.
NSE has already started preparing for this by extending trading hours for interest rate derivative segment up to 5 p.m. from February 2023. SEBI would however do well to take it slow in giving permission to extend trading in equity derivatives on domestic bourses.
It can instead consider allowing traders to trade stock and index futures and options on the exchanges in the GIFT IFSC, since these exchanges are open until 2.30 a.m. IST. The RBI will however have to permit the use of LRS funds for derivative trading on GIFT IFSC to make this possible.