Change in data release timing will not help

The decision to give data after market hours will not bring down volatility. But prudent traders might keep more margins in hand

The ministry of statistics and programme implementation (Mospi) has taken an interesting decision. Future data releases will be scheduled for 5.30 pm instead of being made during trading hours, as was the earlier practice. Since Mospi releases much of India's price-sensitive GDP data, this will change established trading patterns.

If the intention is to smooth out market volatility, I suspect this will not be achieved. When price-sensitive data are released during a trading session, every market participant gets a chance to respond immediately. They could take new positions or exit prior positions.

Let us assume the data, whatever it is, will trigger a large move. If it is released in mid-session, the move comes with fewer price-gaps - that is, fewer price levels remain untraded. Hence, any trader who is caught on the wrong foot can exit without losing too much.

This is why traders much prefer to receive price-sensitive information when the market is open. It is the reason stock exchanges used to schedule special trading sessions in the old days when the Budget was announced at 5.30 pm.

The new timing will mean data are received in the evening and traded only the next morning. The next session might open with a gap. Overnight price gaps always tend to be magnitudes larger than intra-session gaps. This leaves traders who have taken the wrong view in desperate straits, with their stop-losses exceeded. Then they set up feedback loops as they try to exit and their actions cause further price pressure.

To take a simple case, say a trader is holding a short position in the Nifty and the Governor of the US Federal Reserve makes a statement at midnight Indian Standard Time (14.30 New York time), with assurances that the Fed will continue its Quantitative Easing Programme (QE3). The NSE opens the next day with the Nifty quoted at a big upside gap.

The short trader is desperate and tries to exit by placing a long order. This long order adds to the demand for the Nifty and pushes prices up further. Scale up this situation and assume it happens to a million traders. Then, you get the sort of price volatility we have seen in the past year.

Every financial operator and every regulator recognises that overnight volatility can be much larger than intra-session volatility. It is the reason why margins on overnight positions are always higher and one of the reasons why the Securities and Exchange Board of India (Sebi) insists on cash trades being settled at end-of-day. By releasing data at 5.30pm, Mospi will contribute to larger feedback loops and, probably, more volatility.

Every experienced trader has different methods for setting stop-losses. Every experienced trader is also aware that there may occasionally, be adverse moves where they will not be able to exit until way beyond their stops.

I normally trade futures contracts of volatility where I can set stop-losses at roughly one per cent off the entry price for an intra-day position, and at about 2.5 to three per cent for an overnighter. My rule of thumb for calculating potential maximum loss is to average the five most volatile sessions in the past month (20 sessions). I assume that an adverse move could cost about half that much if my stop loss is "gapped out" in a day trade gone wrong.

That is, if the five high-volatility sessions' average is four per cent, I am braced to see the price move about two per cent off my entry price before I can exit a day trade in a volatile market. If I'm taking an overnighter, I am prepared to lose the five session average - that is, twice as much.

Others use different, more sophisticated methods to calculate maximum potential loss. But every sane formula indicates that overnighters are more risky. The Mospi change in release timings will induce the prudent to keep more margin in hand for sessions. But it won't result in less volatility.