When the Metropolitan Sock Exchange of India (MSEI) earlier this month decided to extend equity trading hours by 1½ hours till 5 pm, it once again triggered the debate over whether exchanges should be allowed to trade for longer hours on equities. Of course, the MSEI has little equity volumes on most days and hence it had limited influence on the decision, but both the BSE and NSE have been open to the idea. In fact in 2010 it was NSE which took the initiative to start trading earlier at 9 am and that has remained the practice till date. While longer hours are a part of commodity trading and currency trading, the normal refrain was that equities were not getting the additional trading hours. Here are 6 things you need to know about longer trading hours in equities and whether it is really worthwhile?
1. What exactly is the empirical evidence?
We have seen trading timings extended by an hour in 2010 but that has not resulted in any perceptible increase in volumes in the equity markets. If one looks at the trend of the equity volumes over the last few years, the triggers have little to do with trade timings. For example, stock futures trading took off in a big way in India because it was almost akin to the erstwhile Badla System and hence the level of familiarity was very high. Index options account for over 70% of daily volumes in the market today and that big push was triggered when SEBI shifted the levy of securities transaction tax (STT) on options from the notional value to the premium value. While exchanges have refrained from extending trading hours beyond 3.30 pm in the past, there is no empirical evidence to prove that it could lead to a spurt in volumes.
2. Will long trading hours help Indian markets compete with SGX?
That is another argument in favour of longer trading hours. India has lost a good chunk of its trading volumes to other bourses like Singapore and Dubai. Here again it needs to be remembered that the real factors had nothing to do with the trading hours. For example, the SGX Nifty trading took off in a big way because traders did not have to pay STT while trading in the SGX as opposed to the Indian markets. Also the SGX Nifty is denominated in US Dollars and for global trades it provided a natural hedge against the INR risk.
3. Commodity and Currency Markets and even GIFT have longer trading hours
In India, the commodity markets and the currency markets have had longer trading hours for quite some time now. But both these are a different ball game together. Commodities and currencies are more policy sensitive and also have strong externalities. Hence the broad impact of these 2 markets is much more than in case of equities. Equity externalities are much lower comparatively as is the client spread, which is a lot more homogeneous. Anyways, the GIFT in Gujarat has started offering longer trading hours and it would be instructive to see if the longer trading hour's argument really works there.
4. A big pressure on broker back office infrastructure
The real pressure, according to many brokers, could come from the pressure on the back-office infrastructure. For a broker, the day does not end with the close of trading hours at 3.30. There is back office reconciliation, review of net positions, collection of shortfalls, payouts where it is due, review of risk management, review of compliance etc. Most broker back offices, despite the high degree of automation, are already quite stretched. Longer trading h ours will mean greater pressure on the existing infrastructure and will also entail additional cost. Broking margins are already quite thin in the current context and most brokers feel that adding on additional cost in the form of bigger infrastructure costs will not add any value for them. For brokers, the additional benefit arising from the longer trading hours may not be really commensurate.
5. Trading volumes are still concentrated in the peripheral hours
That has been the trend in the equity and derivatives market over the last many years. The volumes typically tend to be concentrated in the initial one hour and the last one hour of trade. When the trading timings were extended from 9.55 am to 9.00 am in 2010, the volume concentration just shifted to the 9 to 10 slot. In the middle hours, the markets tend to see heavy volumes only if there are some strong news flows or action points. Else the volumes continue to be concentrated in the early hours and the late hours of trading. This is once again a case against extension of trading hours from a practical perspective.
6. A major pressure on global Foreign Portfolio Investors (FPI) trades
This could be a real major issue for the brokers. Currently, when FPIs trade through brokers, the trade confirmations are sent across to the FPI clients between 4 pm and 4.30 pm. That gives the institutional clients in Asia enough time to reconcile the trades and approve the same in the next one hour. Assuming that trading extends till 5 pm, the confirmations will be completed only by around 6 pm and it will be almost 7 pm before all the trades are fully approved by the FPI client. Considering that most clients for F&O and equities are based out of Hong Kong and Singapore, it becomes a logistical hassle. Both HK and Singapore are 2 ½ hours ahead of India and one can imagine the problem if institutional traders are made to wait till 9.30 pm each day. That is obviously not a practical scenario.
In a nutshell, it appears like the incremental benefits of extending trading hours may not be commensurate with the costs and the effort. Not surprisingly, the exchanges have chosen to put off the decision for the time being!