Extended trading-hour plan in cold storage as small, traditional brokers resist move

The current proposal is to extend trading hours for index futures from 6 pm to 9 pm. The settlement of these trades is to be clubbed with the next day's main session, as per NSE.

The National Stock Exchange's proposal to extend trading by three hours in the evening has been sent back for further talks, sources have told Moneycontrol, as small, traditional brokers, who have very low volumes, oppose the move.

The proposal, which found overwhelmingly support among big discount brokers as well as high frequency and prop trading firms, had been awaiting the approval of the Securities and Exchange Board of India (SEBI).

"The proposal has been sent back for further discussions as all stakeholders are not in agreement. Small and traditional broking firms are pushing back as they will have to invest in technology to keep pace," people aware of the developments told Moneycontrol.

The National Stock Exchange was yet to respond to Moneycontrol's queries.

There are about 4,951 SEBI-registered stock brokers in the equity segment. Of these, 3,563 are registered in equity derivative segment. However, volume-wise, top 20 brokers have around 86 percent market share of NSE active clients.

SEBI chairperson Madhabi Puri Buch had said on an earlier occasion that a final decision would be taken after receiving feedback from a wider set of market participants.

Also Read: Extended trading hours: Pain for traditional brokers, gain for digital brokers?

“Just one part of the ecosystem (exchanges) has come to us and that is not sufficient, so we have communicated that the feedback of the broking and investor communities is needed. Only after we analyse their feedback, we can take a decision,” Buch said.

NSE was aiming for extended trading hours by March 2024.

The proposal is to extend trading hours for index futures from 6 pm to 9 pm. The settlement of these trades would be clubbed with the next day's main session. The exchange is of the view that additional hours in the evening would hedge portfolios from global events.

Challenges faced

Smaller brokers fear that volumes will not come initially but costs will mount. The window between 3.30 pm to 6 pm is too short to settle the trades and create fresh files for clients for the evening session.

"Smaller brokers rely on the exchange for trading and margin files. These files come by 6 pm, processing is done by 7 pm, payout by 8 pm and fresh deposit as well as client holding for next day is finalised by 9 pm," said Shrey Jain, founder, SAS Online.

"Meanwhile, bigger brokers generate the files at their own end. They use the exchange files only to reconcile and cross-check the data."

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Another concern is that extended hours would generate a lot of volatility, as the underlying stock will not be trading at that moment. NSE, however, has indicated that to begin with, additional trading hours will only be for index futures. Index options and stock F&O will come at a later stage.

"Index futures are a good start. Think about this, we witnessed two significant gap ups in December. One, after the BJP's win in assembly elections of three states and second, after Federal Reserve's dovish comments. In both the cases, Indian traders, too, could have positioned themselves well, had there been an evening trading session," HDFC Securities chief executive officer Dhiraj Relli.

Nonetheless, he, too, sees how smaller and traditional brokers at a disadvantage. "Brokers will have to set up a centralised dealing desk. Firms that operate via relationship managers will have to go digital. This only means that consolidation in the broking industry is on the anvil," he said.

Also Read: Additional trading hours & investors losing money in F&O are different topics, says NSE's Sriram Krishnan

India's broking industry

In most markets, derivatives volumes account for 5-15x their cash market volumes. In India , however, derivative volumes are more 400x higher than those of the underlying cash market, having grown from 3x in 2010, as per an Axis Mutual Fund study.

According to the consultancy firm Bain & Company, this boom in F&O would help in doubling of domestic retail brokerage industry's revenue over the next five years.

Revenues from the retail brokerage sector in India have already doubled, from Rs 14,000 crore in FY19 to Rs 27,000 crore in FY23. The top five brokers in terms of NSE active clients are Zerodha, Groww, Angel One, Upstox and ICICI Securities.

Also Read: Khelo India | Mapping the boom in derivatives volumes and the rush towards F&O

COVID-19 was a turning point for retail investors' participation in capital markets, with several discount broking firms cropping up. The average revenue per user (ARPU) for the sector has decreased from about Rs 6,000 in FY19 to Rs 5,000 in FY23, the report added.