What longer trading hours will mean

Earlier this year, when the Securities and Exchange Board of India (SEBI) mooted extending trading hours on Indian bourses, it essentially hoped to facilitate better price discovery and thereby help investors. Another, but more understated, part of the agenda was to infuse life into the derivatives segments, especially the Nifty Futures trading where the fear was that our markets will get exported.

Generally speaking, the most important hours on the stock markets are the first and the last hours. Almost 55-60 per cent of the volumes are registered during these two hours. The problem was, because of the time difference between India and countries in the Far East, these markets were well into their trading day when the BSE/NSE opened. Volatility in these markets affected the Indian markets and often the difference between the closing and opening prices was steep. An early opening of the market is expected to correct this.

Second, and equally critical, is the issue of the market for Nifty Futures which have also been listed on the Singapore Exchange. It was apparent that given the fact that Singapore Exchange opened earlier than the BSE/NSE and that a lot of the institutional investors in the Indian market were also based there, increasingly, the market for Nifty Futures was moving to Singapore. The extended trading hours will correct this to an extent.

But there are other issues which might still need time to get sorted out. For one, the extended hours would mean additional pressure on the back office processes. Any lag in these could be disastrous for a brokerage house in terms of risk management. While a lot has been said about how institutional brokerages will now have to work longer hours, I think the real challenges will be faced by brokerages that cater more to the retail clients. Fact is institutional brokerages already work longer hours to coincide with the hours put in by their clients in India or Hong Kong or Singapore. It is the retail brokerages with offices running into thousands that will have to make arrangements to coordinate their front and back office processes.

I don’t think volumes will go up significantly for the brokerages and, as a result, neither would the revenues. The larger issue for brokerages has been the numerous holidays, which could also impact volatility and activity, and we are hoping that these will be cut down. For the extended hours to work smoothly it is critical to ensure that the settlement process with banks is aligned. Despite the efforts by the central bank, the Real Time Gross Settlement (RTGS) system so far has been a limited success. Now, with the amount of time for settlement being curtailed, it is even more critical that RBI as well as the banking system push for RTGS more aggressively.

The ideal solution would be to have only index futures traded for extended hours while everything else continues with the current schedule. This will achieve all the benefits of longer hours while still not stretching the brokerage back office.

To summarise, while the modified version of extended trading hours for only index futures markets would be welcome, it might mean adjustments in the short run for brokerage houses. Market players will have to automate their systems to a greater extent to ensure that there are no lags in the settlement process.