Sebi chooses to tread cautiously, no rush to stretch market hours

When Ashishkumar Chauhan, chief of the National Stock Exchange of India (NSE), hinted at an extended trading session in December 2022, derivative traders found themselves divided. One faction welcomed the decision, seeing it as an opportunity to factor in global news, while the other hesitated, wary of heightened volatility 

in a segment where 90 per cent of traders face losses.

Six months later, NSE submitted a proposal to the Securities and Exchange Board of India (Sebi) to extend market hours, allowing trading of index derivatives to also continue from 6 pm to 9 pm as a precursor to an even longer trading session. It had hoped that this three-hour extension would be in place by March 2024, but that seems unlikely.

The Indian exchange isn’t alone in pursuing extended trading hours. South Korea’s bourse operator has also sought approvals for night-time trading to mitigate the impact of global news.

While the number of India’s cash market trading hours is similar to that of the United States, the US boasts various trading venues like NYSE and Nasdaq that conduct evening derivative sessions. Entities such as the CME Group and the Singapore Exchange (SGX) operate virtually round the clock for key indices.

Moscow Exchange in Russia allows equity derivatives trading from 7 am to midnight, and Eurex Exchange is open until 10 pm.

The Indian market regulator, however, is in no rush to stretch the hours, choosing instead to tread cautiously. 

Sebi intends to gather feedback from brokers and investors to evaluate market impacts, infrastructure readiness, and investor interest in an evening session, regulatory sources say. It has sought fresh inputs from broker bodies such as the Association of National Exchanges Members of India (ANMI), Bombay Stock Exchange Brokers’ Forum, and the Commodity Participants Association of India, they add.

Before submitting the proposal, NSE had conducted consultations with several market participants over nine months and claimed “‘large consensuses” among them. Sources, however, say the bourse did not look at projections for trading volumes or assess how many investors and traders would participate in the evening session.

BSE, meanwhile, has so far made no request to extend trading hours.

While Business Standard spoke with several stakeholders to gauge the sentiment, queries emailed to Sebi, NSE, BSE and ANMI remained unanswered till the time of going to press. 

After Sebi’s board meeting in Novem­ber, Chairperson Madhabi Puri Buch had said the proposal required broader consultations with key stakeholders.

Big small problem

Traditional and smaller brokers, already facing intense competition from technology-driven discount brokers and bank-based entities, aren’t keen on the proposal. More so, as discount brokers’ share among active NSE clients was 

60 per cent in 2022-23 (FY23).

Traditional brokers are concerned that the higher costs involved in extended trading would potentially outweigh the higher revenues they might generate. 

Operational issues such as manpower, surveillance, tech readiness and system capabilities add to their apprehensions. To address these, they will need to deploy extra resources and maintain an active back office for longer hours, thereby incurring additional costs.

“The demand for extension has come from discount brokers with a high volume of derivative traders. There’s no benefit [in it] for retail investors. It will only add pressure to trade in the evening or lose out,” says a broker who services NRI clients. For small to midsize brokers, he says, this will increase variable costs and HR pressure without revenue gains.

Experts indicate that certain bank-based brokers, too, might not be in favour of the extension as their clientele primarily comprises institutional investors.

“The extension may offer arbitrage hedging opportunities. Domestic investors interested in participating can leverage Gift Nifty contracts using their Liberalised Remittance Scheme (LRS) limits,” suggests a traditional broker.

Gift option

Gift Nifty contracts — dollar-denominated Nifty future contracts traded at the international exchanges in Gift City — are accessible for nearly 22 hours.

Voices within the industry caution against allowing overseas exchanges to dominate Indian trading and emphasise the need for action within Indian exchanges or through GIFT City.

In July, India successfully shifted Nifty contracts from SGX to onshore trading. 

Gift Nifty recorded a turnover of $65.5 billion in December 2023 — up from $61.7 billion the previous month. MSCI India Futures on Eurex Exchange observed an average daily turnover of $5.8 million in December, up from $2.7 million in December 2022.

On concerns about the underlying cash equity market remaining closed while the derivative segment trades, an expert with experience at the exchanges says, “Globally, this is the accepted practice for hedging products, specifically for index derivatives. Nowhere are cash equities available for round-the-clock trading. The same goes for our Gift Nifty contracts.”

The market regulator, while cautioning against risks in futures and options, faces demands for an evening session to accommodate hedging requirements. “There is a need to understand the extent of this demand and expected trader and investor participation,” says a broker.

Balancing act

NSE’s submission argues for extension to help Indian investors hedge their positions, boost liquidity and reclaim volumes from overseas exchanges.

The argument is that when European and US markets — the main drivers for global equities — are active, the Indian domestic market remains shut. This puts onshore traders at a disadvantage.

For instance, gap-down openings, like during the onset of the coronavirus pandemic or the Russia-Ukraine conflict, had left investors unable to hedge against losses through derivatives. A gap-down is when the market opens at lower levels than the previous day’s closing. 

On March 23, 2020, for example, Sensex opened nearly 8 per cent lower after the Janata Curfew the previous day and amidst indications that India was entering a total lockdown. And after Russia invaded Ukraine, Sensex opened with a gap-down of over 3 per cent on February 24, 2022.

Several brokers say that hedging through index derivatives in the evening session could help investors to cut their losses in such events.

“If India wants to become a global investment destination, then our markets must be open round the clock,” says a discount broker with over 400,000 clients.

The ball is now in Sebi’s court — how to be a trapeze artist in this balancing act.