Sebi may delay extending trading hours at derivatives markets till 11.55 pm

Framework for settlement, surveillance is not yet finalised; no consensus over product offers, say market players

The Securities and Exchange Board of India (Sebi) may delay extending the trading hours at the derivatives markets till 11.55 pm because it hasn’t been able to resolve a few issues, according to sources.

Starting October 1, the derivatives markets were supposed to remain open till 11.55 pm.

“The detailed framework for the settlement process, risk management systems, monitoring trade positions, and surveillance mechanism is yet to finalised,” said a person privy to the development, adding it was unlikely the exchanges would be able to extend the trading hours from October 1.

Senior officials of the stock exchanges said while they had submitted proposals to extend the trading hours, the regulator had not given the green signal.

Sebi and the exchanges are evaluating aspects of the settlement mechanism, they said. “The settlement may need to be done in two cycles. Trades carried out during the core market hours may be settled the way they are now. Evening trades may be required to settle the next morning,” said an official.

On risk management and surveillance too, exchanges are working on measures to facilitate longer trading hours. “We are in talks with Sebi regarding the enhancement of the surveillance and monitoring systems,” said an exchange official. 

An email sent to Sebi did not elicit any response. In May, Sebi allowed the domestic stock exchanges to extend equity derivatives trading till 11.55 pm, aiming at attracting investors dealing in Indian products on exchanges in Singapore and Dubai. Currently, the Indian markets commence trading at 9.15 am and close at 3.30 pm.

Besides, the regulator is looking at misgivings it has received from market participants on cost escalation and products offers during the extended trading hours. Sources say the stock exchanges and brokers are not on the same page over product offers. Sebi is said to have received representations from stakeholders in this regard and it may take time addressing them.

“There is no consensus between the stock exchanges and brokers about what products shall be offered in the extended hours. Some in the brokers’ lobby are insistent that only index futures and options should be allowed. Some want individual securities also to be traded,” said a person cited above.

Some participants say to factor in global macro developments, index derivatives alone would be enough for investors to hedge volatility. 

“Sebi should permit trading only indices and not futures and options on individual stocks. Allowing stock derivatives to trade beyond normal trading hours makes them susceptible to price manipulation,” said Rajesh Baheti, president, Association of National Exchanges Members of India.

Baheti said as the underlying cash market would be shut, a person acting in concert may drive prices for the next day’s cash market, which may be a problem to equity investors. Another possible situation would be when companies may announce market-sensitive information after closing to benefit those who are watching market at odd hours. Longer hours for the derivatives market, which is typically used by investors for hedging, will cater to investors operating out of Europe and the US and will provide a tool for domestic investors to price in the news flow that comes after the market hours.

However, some say the real-time alignment with the global market may result in infrastructure challenges and could put a lot of medium- and small-sized brokerages under pressure.

“The move may put small brokerages at a competitive disadvantage. Also, they cannot match digitally advanced platforms as compared to big brokerages,” said Alok Churiwala of Churiwala Securities.

Longer derivative trading hours, however, are a trend across global exchanges. Platforms such as Singapore Exchange and CME Group offer round-the-clock trading in key equity indices. Shorter trading hours in India are seen as a reason for shift in domestic trading volumes to overseas exchanges.In the past, Sebi had granted the extension of trading hours up to 5 pm for the cash segment. However, none of the exchanges opted for the extended hours on account of resistance from brokers.

TAKING STOCK

• Settlement mechanism for extended trading not yet finalised 
• No consensus among exchanges, brokers over product offering 
• Small brokers raised apprehensions over cost escalation 
• Sebi received representations from several market participants 
• Regulator has not yet approved stock exchanges proposal for extended trading hour
• Sebi wants all market participants to be on same page 
• Exchanges in talks with regulator over surveillance measures