How extending trading hours will help traders, challenge brokers

The National Stock Exchange of India’s proposal to extend trading hours for equity derivatives will help traders respond to global events faster but will also pose significant challenges for brokers.

The NSE has sought approval from the Securities and Exchange Board of India to introduce evening trading sessions in the equity derivatives segment. The exchange proposes to add a session from 6 pm to 9 pm. This would enable trading in futures and options beyond the regular hours of 9.15 am to 3.30 pm.

The NSE is even considering extending this session to 11.30 pm, according to people familiar with the plans.

SEBI has already framed rules that allow exchanges to keep futures and options (F&O) trading open until 11.55 om and equity trading until 5 pm.

The primary objective of extending trading hours, as envisioned by the NSE, is to provide Indian traders with the ability to respond more swiftly to global events. Additionally, the longer sessions are expected to boost trading volumes and address concerns over significant traders, including proprietary desks and hedge funds, shifting to competitors such as GIFT City, where round-the-clock trading is available.

Global markets

Arun Kumar Mantri, founder of Mantri Finmart, welcomed the regulatory move.”The move will level the playing field for retail traders seeking to hedge their portfolios against global volatility. Derivative traders will also have the option to adjust their positions based on cues from the global markets,” Mantri said.

“Keeping pace with global markets, where trading is available for up to 22 hours, this move will open up more opportunities,” said Shilpa Rout, derivatives lead analyst at Prabhudas Lilladher. “Adapting to this change will necessitate significant adjustments to existing infrastructure, particularly for brokers, but the long-term benefits are promising.”

According to Chandan Taparia, head of derivatives and technicals at Motilal Oswal Financial Services, a primary consideration is the impact on broker infrastructure.

“Extending trading hours would mean that brokers would need to adapt to a continuous trading environment throughout the day. Additionally, a significant concern is how transactions would occur when banks are closed,” Taparia said.

He said there are also questions about the capacity to support extended hours and the availability of staff for night shifts.

“We must also consider how analysis and report generation will take place without a clear cutoff point. Deciding whether the closing should occur in the first or second session is a key point of discussion and adjusting to these timing changes may take time,” he said.

However, Taparia emphasised two significant advantages of extending trading hours. Firstly, it is expected to improve trading volumes.

Secondly, it would reduce the likelihood of gap-up or gap-down openings. Longer trading hours would enable the market to better incorporate global developments, mitigating the potential for sudden price gaps resulting from late-breaking news after 3:30 PM. Indian markets would be more closely with global counterparts, many of which have extended trading hours in derivatives.

Arbitrage opportunities

However, Taparia highlighted a crucial challenge: the potential price disparity between the cash market, which closes earlier, and the futures and options market if their trading hours differ. While derivatives have historically closely tracked cash market prices, extended trading hours could disrupt this synchronisation, creating arbitrage opportunities and price mismatches.

“Indian markets in derivatives have more speculative traders, while global markets like the US primarily involve hedge funds. Derivatives turnover in India is 400 times that of the cash market, making the net impact significant compared to global markets. Therefore, enhanced risk management facilities are essential. Accommodating extended trading hours will require significant changes in facilities, risk management tools, and infrastructure if the NSE decides to proceed,” Taparia said.

Taparia argued that the Indian market does not necessarily require additional trading volumes, given the daily expiry in the derivatives market. There is already ample activity with Monday to Friday expiry dates across indexes. Furthermore, the turnover in the Indian derivatives market is already the second-highest in the world.

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