NSE’s plan to extend trading hours: Additional session to see lower volumes, higher volatility

The National Stock Exchange’s proposal to extend trading hours is sparking discussions among brokers, traders, and analysts. One key point of debate centres on the potential impact of extended trading hours on trading volumes and volatility.

The National Stock Exchange (NSE) has formally requested approval from the Securities and Exchange Board of India (SEBI) to introduce evening trading sessions in the equity derivatives segment. This move would allow market participants to engage in futures and options trading beyond the regular hours from 6 to 9 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 trading sessions are expected to boost trading volumes.

In a conversation with Moneycontrol in Xspaces, Chandan Taparia, Head of Derivatives and Technicals at Motilal Oswal Financial Services, commented on trading volumes, stating, “If we observe other markets, like the US market or developed liquid markets, where trading hours are already extended, the maximum volume continues to typically be seen during regular market hours. During the aftermarket, significant volume is not observed. So, the volumes during extended hours are expected to be lower, and overall liquidity will be reduced. It’s similar to trading Bank Nifty on a Thursday or Wednesday compared to trading Nifty Midcap or the Sensex, where liquidity is relatively low. Similarly, the extended trading hours may have lower volumes and may not match the morning volumes.”

Kirubakaran Rajendran, Founder of Algo Trading firm squareoff.in, added, “More trading hours may not necessarily result in higher volumes. It’s more of a market-making model. When there is low liquidity in the markets, sudden upward and downward movements can occur. Such violent moves happen when there is a lack of market liquidity, especially in the second half of the day. During this time, price movements will depend more on lower liquidity than underlying factors. This could lead to slightly higher volatility, primarily due to lower volumes in specific options or instruments.”

Taparia argued, “In the context of the Indian market, we’ve witnessed a significant surge in derivatives trading. From a data perspective, the Indian market’s derivative-to-cash ratio is around 420 times, whereas Germany, the country with the next highest ratio, is close to 35 times. This suggests that we are already seeing substantial activity in the derivatives segment. The question arises: Are we promoting derivatives markets more than necessary? Perhaps we should focus more on cash trading.”

“While derivatives are good for hedging, arbitrage, and speculation, emphasizing them further could lead to an even higher derivative-to-cash ratio, which is already four hundred times higher than in any other country with active derivative trading, These are questions that need to be considered, and regulatory authorities must address them,” added Taparia.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.