Extended trading hours: What's in store for traders and brokerages?

Those batting for the extension of trading hours have sound logic to back up their demand (Representative image: Reuters)

The murmurs on the extension of trading hours have fanned an old debate on whether the move will be advantageous to the market stakeholders. While the decision might benefit retail traders by helping them capitalise on the global events that transpire during the post-market hours, it is certain to pile on cost burdens, operational lags, and time crunch for brokerage houses.

For the record, this isn’t the first time that the rather sensitive and factious matter has come to the fore.

In December 2009 as well, the market regulator had given a go-ahead to the extension of trading hours. Immediately after the announcement, India’s two leading stock exchanges, the BSE and the NSE, were at loggerheads with each, and a brief but boisterous one-upmanship clash erupted on whether the markets would open at 9 AM or at the usual market opening time then ― 9:55 AM. NSE, which pitched for a 9 AM market opening, won, and Indian markets have been opening at 9 AM since then.

Another major development came about in October 2018 when the Securities and Exchange Board of India (SEBI) cleared the pathway for equity derivatives to be traded between 9 AM and 5 PM. The proposition, however, was put in deep freeze, and almost forgotten until very recently when NSE MD & CEO Ashishkumar Chauhan told a business daily that NSE is consulting other members on the possible extension of market trading hours.

Signaling that is keen on following up on its intent, the NSE extended trading hours for interest rates derivatives till 5 PM from February 23.

Good times ahead for retail traders?

Those batting for the extension of trading hours have sound logic to back up their demand. As the operations of the global economy meld into one integrated whole, information emerging from one country leaves a strong impression on the markets in other countries. Indian markets are no exception to this global phenomenon and goings-on in other developed countries, such as a rate hike by the US Federal Reserve, do create strong headwinds and tailwinds for different sectors in India. Naturally, SEBI, not to mention, scores of Indian investors would want to align themselves with international markets with a view to ensuring better price discovery, and reduction in volatility and impact cost.

Heads of two brokerage houses that Moneycontrol spoke to ― Prakash Gagdani, CEO, 5paisa.com, and Tejas Khoday, Co-founder and CEO of FYERS ― agreed that India needs to align itself with the global markets. The duo welcomed the extension of trading hours marking it out as a move that will benefit the new wave of retail traders who have been dominating the Indian markets in the aftermath of the pandemic.

“Extending trading hours will help in curbing the volatility vis-à-vis events transpiring after 3:30 PM. Typically, these are global events which carry overnight volatility. The traders will benefit from longer trading hours, considering that it opens up the possibility for them to harness more trading opportunities,” Gagdani told Moneycontrol.

Tejas Khoday, Co-founder and CEO of FYERS also supported the move indicating that extending market hours in the equity futures and options (F&O) and currency segments is necessary not just for hedging overnight risk from global uncertainties but will also simultaneously be in the interest of long-term investors.

“Resistance and negativity regarding this topic could inhibit the growth of our capital markets because financial markets are increasingly interconnected, and cutting off access to hedging options will prevent India from becoming a global investment destination. Enhancing the ability to hedge with futures & options increases confidence, which, in turn, improves the commitment to invest more. It can trigger a virtuous cycle that could ultimately benefit everyone.” Khoday added.

While the move will benefit the ecosystem at large, it will drag down the finances of brokerage houses.

Going gets tough for brokerages

Gagdani said that brokerage houses are in for a tough time, and will be troubled not just by the rising costs but also by the regulatory reporting framework leading to a time crunch.

“As far as brokers are concerned, there are two main disadvantages. One, extended trading hours will lead to complete cost increases of all the related processes like technology, people costs in products & technology, operations, risk management, etc. All the costs will practically double because the working market hours will double from eight and a half hours now to almost 16 and a half hours a day. So, the entire infrastructure to run the operations and trading platform will double,” he said, adding, “Secondly, regulatory reporting will increase. All the processes like early payments, MTM trade settlements, trading, and billing ― the time required for all these activities will be crunched. On the operational side, there will be time crunch and delays.”

“Currently, as a broker, we have a window from 4:30/5 PM to the next day morning to complete the operational processes as well as reporting. With the extension of trading hours, the window will narrow to just five to six hours, that is, from 12 midnight to 5:30-6 AM.”