Extended trading

Sebi must evaluate costs and benefits carefully

The Securities and Exchange Board of India (Sebi) is reported to be considering another round of stakeholder feedback and consultation before it comes to a decision on the National Stock Exchange’s (NSE’s) proposal to extend trading hours for index derivatives. The extension will impose additional costs on brokerages, along with the exchange and clearing houses, while it could lead to volume expansion and give investors better coverage against unforeseen risks in Western markets. The NSE proposes to extend trading hours for equity derivatives from 6 pm to 9 pm. Sebi wants to review and address potential infrastructure, surveillance, settlement, and unforeseen risks before giving the go-ahead although, in principle, it had already said it would be amenable to keeping the markets open till 11:59 pm.

In practice, Gujarat International Finance Tec-City (GIFT) offers extended trading hours for dollar-denominated Nifty derivatives. The rupee-denominated commodity derivatives segment is open till 10 pm. Cross-currency instruments and commodity derivatives are traded 24x7 across global exchanges located in cities such as New York, London, Dubai, Chicago, Singapore, and Hong Kong. An evening NSE session would give participants the opportunity to respond in a timely fashion to price-sensitive developments in Europe and America. European exchanges open in staggered fashion in mid-afternoon — from around 2 pm India time — while the New York Stock Exchange and the Chicago Board of Trade are open from around 7 pm. Developments in Europe and America have an impact on India. But these cannot be offset using rupee instruments until the next morning’s sessions. As a result, if there’s a significant price-sensitive event, markets open the next morning with a big gap. This, in turn, means substantial overnight margin requirements. The rationale for keeping markets open in the evening, therefore, could include generating higher contract volumes as well as potentially lower margin requirements for index derivatives.

On the flip side, most traditional brokerages, the exchanges, and clearing houses would need to run more shifts. They will have to upgrade margining and reconciliation systems and software to cope with an evening session. Those additional costs would, it is hoped, be offset eventually by income derived from more trading volumes. It may also be noted that there could be significant mathematical adjustments required if equity index derivatives were available for trading in the 6-9 pm session but the underlying stocks and stock derivatives were not available. The Nifty, for instance, has 50 stocks as constituents and the movements of the index are derived from the movements of constituent stocks. Those stocks are also the underlying assets for popular individual stock futures and options. India is among the largest equity derivatives markets in the world in terms of sheer contract volumes.

In the proposal as it stands, the derivatives of the Nifty and the Bank Nifty would be traded in the evening but individual stocks and their respective derivatives would not. This would mean complicated adjustments the next morning across constituent stocks. If the index derivatives experienced a big move in the evening session, there could be a cascade of adjustment across equity and derivatives markets, while also throwing up arbitrage opportunities, which, in turn, would demand surveillance to track. The regulator, therefore, is being cautious in assessing the potential impact of an extension of trading hours with a restricted choice of instruments. There’s clearly a case for allowing a rupee-version of index derivatives to be traded across extended hours. But Sebi must indeed think through the consequences carefully.