Tech brokers, HFTs keen on extended F&O trading hours, says NSE's Sriram Krishnan

What is the thought behind these additional trading hours?

Fundamentally, we all need to accept the fact that India's stature in the world is changing by the minute. We are already the top fifth economy. And many people believe that we will be the third-biggest in a few years. Therefore, we will also be impacted by global events. If there is an event, which impacts the Indian capital markets, we need to protect our investors. Therefore, it's important to have a trading window in the evening hours, particularly when the US market opens.

For example, if there's any negative news when the news flow from the US starts, investors here will have an opportunity to hedge their portfolios if there is an extended session.

This is the underlying thought process. I don't think, fundamentally, anybody disagrees with this thought process. Having said that, there is another school of thought, which is our only concern: that is the increase in options trading activity and investors making losses.

As an exchange, we are trying our best to improve investor awareness and education. In the US, investors rampantly trade in options, but nobody is bothered about investor's losses, because they are all knowledgeable, educated, fully aware investors. Therefore, it is assumed that they are going there knowing fully well about the downside, and whatever happens is their responsibility.

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We're not saying the same thing for Indian investors, because we feel that India's investors are not fully aware of the downside risks in options trading, and, therefore, we tend to sympathise with Indian investors who might lose money in the whole process. These are two different topics altogether.

The overriding motivation for us is to help build the framework for the future. I think the 6-9 pm session is a small start in that direction.

The extended trading hour doesn’t really solve the problem of gap-up, gap- down openings because some of the market-moving events like the FOMC outcome come much later during the trading session. Do you have a roadmap for further extension of trading hours?

If you want to participate in an upcoming marathon, you have to start training for it. Right now, you're not even running. If we want to have a 22-hour long trading window, we can't just straight away roll it out from tomorrow, especially since many members are already trading commodities. Commodities are a segment where trading is on till 11:55 pm.

We are making a small start with 6-9 pm. After six months or so, we will review the experience and if people feel that this is a good experiment, we should extend it. We are enabled by the regulator to go up to 11:55 pm. The long-term objective for us should be to be on par with developed markets.

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What are the experiences of global markets when they moved towards additional trading hours beyond daytime?

Most of the large developed exchanges in the US, Europe, Japan and Singapore have long trading hours for futures. The Singapore exchange used to be a 22- hour long exchange and SGX Nifty was available 22 hours every day, which is why when we migrated from SGX Nifty and made it GIFT Nifty. We had to offer it for 22 hours.

The NSE International Exchange, which is a dollar-denominated exchange, is already up and running for 22 hours. The rest of the world is happy with that exchange.

The open interest was about $7 billion when we moved the product in July. In 3-4 months, we have reached $12 billion. Clearly, the product is doing well and the infrastructure has held. Given that we already have the technology and capability, why aren’t we doing it onshore? This is the start, we will do this onshore at the right time when all stakeholders are aligned. We have done nine months of consultation with various stakeholders. This proposal is the outcome of those consultations.

Who was the biggest constituency that asked for it? Is it the foreign or domestic investors, or the traders?

The landscape has changed. Everything is now technology-oriented. If you look at a large number of members, they've all embraced technology -- the likes of Zerodha, Groww, Upstox, Paytm, etc.

Likewise, there are prop traders who have become technology-oriented. They have a presence in pool allocation, they have algos, they have faster ways of trading and so on. Then there are high-frequency traders, both domestic and foreign. They are very keen about any extension and trading opportunity because, for them, everything is machine-operated. So they have to just run the programme till 9 pm instead of 3:30 pm. All of them are very keen to participate in this.

Larger institutional investors, like asset management companies or insurance companies, are already happy, because there is a window of opportunity for them to hedge their risks in case of a global event, which definitely will have an impact on the Indian capital markets. It’s the small brokers who haven’t made significant investments in technology who will oppose this. But many of them realise that the world has changed and they need to change. This proposal and set of suggestions in terms of what we should do in the evening has come from the stakeholders. Although initially, foreign investors might not have supported it, today, the top FPIs in the country are in support of this.

What are your expectations, in terms of how trade volumes, liquidity and volatility will change when we extend the trading hours?

We have no expectations. It is possible that there will be no liquidity. In that case, we will look at what is needed to improve liquidity. It’s possible that it will be very liquid, and will be acclaimed as a great success. It's possible that we will make a mediocre start, as only the younger generation participates during evening time.

In that case, we could see a behavioural change in the other investors, and, gradually, there could be greater participation. I'm happy to go in with a 66 percent probability of success! We are a market infrastructure institution, we don't look at profits and revenues when we make such decisions. Our objective is to put in place the infrastructure for the future and help the country go ahead and become a developed country and claim its rightful place in the comity of nations. That's the simple objective.

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Is the trading available for only futures or options also?

The world over, cash equities are closed at a certain time and then only futures are available. Options are not generally available anywhere. So it's a contentious point on whether we should make trading available in futures only or in both futures and options. We haven’t made a final call. We have applied in general for permission to do both. But it doesn’t mean that we will do both.

In terms of the exchange itself, is there any additional investment involved in augmenting your infrastructure or staffing to deal with this additional market extension?

We already have people working round-the-clock for all practical purposes. We may have to add a few people to do certain things, but it's not so significant.

Settlements will be clubbed with the following day’s trading?

Yes.

Expiries?

Whatever happens in the evening, just imagine that it has happened the next day. We will handle the expiry as if it happened the next day. The only thing that you need to be aware of is that margins need to be available for you to trade, which is the same principle during the day as well. The same thing will apply in the evening.

What is the timeline you're looking at for rolling this out?

It depends on regulatory processes. First, we need to get approval from the Securities and Exchange Board of India (Sebi). Once they approve, we will again get into a quick consultation mode with market participants and announce a timetable or a goal line that will be comfortable for everybody.