Extended trading hours will level the field for retail players

Extended trading hours would dramatically reduce overnight market risk. (Representative image)

National Stock Exchange CEO Ashish Chauhan’s proposal to extend trading hours for equities at a pre-budget roundtable meeting organised by three Indian markets industry associations is a strong and beneficial idea.

Longer trading hours will make overnight market risk more manageable, create greater safety in markets, and attract more market participants including mutual funds, foreign institutional investors (FIIs) and major retail players. Further, it will make markets more equitable for retail participants who otherwise have no access to the Singapore Exchange (SGX) to manage risks.

Extended trading hours would dramatically reduce overnight market risk. Retail players tend to settle trades on an intraday basis, often because they face high overnight risk. Overnight developments in global markets can impact our markets considerably. For example, significant gap-up or gap-down openings can inevitably make it more expensive to trade and discourage greater equity participation.

Overnight risks also introduce vulnerabilities in the overall market structure and can lead to unforeseen margin calls and black swan risks. Extending market hours until 11:55 PM gives participants an opportunity to price in developments in several geographies, and even capture the opening and a good part of US market developments in real-time.

As a strong believer in all changes introduced by regulators and exchanges to make market volatility and risk more manageable, I believe the benefit of increased retail participation in the equity market greatly outweighs the initial operational cost. Based on my experience, this is likely also to occur with a move to longer trading hours.

The NSE CEO’s suggestion for longer trading hours will level the playing field for retail, as it previously had no option to hedge itself using SGX like foreign institutional investors (FIIs) do when our markets are closed. I completely agree with him that we have no reason to send business abroad when we are fully equipped to offer longer trading hours right here in India, uniformly for all participants.

Reports show that Nifty volumes on SGX were close to double those of NSE in 2021 in terms of amount and were more than 3x the open interest. These figures indicate a significant opportunity to attract larger volumes of trade on our own exchanges, making them more liquid and effective for all participants.

We would not be the first to move to longer trading hours. Developed markets like the US already remain open for 16 hours, and SGX Nifty is tradeable for 17 hours. These markets have effectively managed real-time hedging of risks and reduced overnight risks.

Digital Revolution

Thanks to technological developments, we are prepared for such a change. Many aspects of trading have the necessary experience for this move, as commodity markets have been functioning from morning to 11.55 pm for years. Moreover, given the extensive digitisation of our industry, almost all processes are automated, so the need for manual interventions will be minimal.

Until 6-7 years ago, most brokers performed only a small portion of trades online. They had to have a significant front office presence through both branches and call centres to accept and execute client orders. Now customers can place orders through our mobile app, and 99 percent of trades are performed online.

In fact, the data indicate customers’ preference for mobile apps and online trading, as 59 percent of the NSE active client market share is with the top five digital brokers, up from a low 12 percent from four and a half years ago. Other major brokers in India are also moving toward trading on mobile apps as retail equity participation has largely moved toward digital platforms. In the last 10 years, broadband subscribers have increased from one crore to 79 crore, and smartphone penetration has gone from 8 percent  to 66 percent.

The Unified Payments Interface (UPI) has revolutionised real-time digital payments, with close to Rs 84 lakh crore of transactions in the financial year 2022. Such developments have facilitated frictionless trading accounts for customers with real-time fund pay-in and support longer trading hours. Similarly, mobile apps and other online channels have simplified order placement for retail participants, making them more affordable and further facilitating the extension of trading hours.

Since front offices are now largely digital, the trading market will face almost no extra cost to migrate to extended business hours. Similarly, the technology of the back office and the advent of Straight-through processing have brought significant progress from the days when firms needed large teams to manually download and upload files and reconcile data.

Regardless of the length of trading hours, digital technology can ensure smooth pay-in and pay-out processes, margin maintenance, and other necessary tasks. I’m certain that, once the exchanges agree to roll out longer trading hours, depositories too will adapt rapidly to provide an enabling ecosystem to support longer trading hours with T+1 settlement, just as banks geared up rapidly to offer real-time payments with the advent of UPI.

The time is right to adopt longer stock trading hours. Doing so will strengthen our markets, eliminate unnecessary risk, and leverage global best practices and learning. It will help us take another step toward safer, more efficient, and fairer retail participation in our equity markets.

Dinesh Thakkar is the chairman and managing director of Angel One. Views are personal, and do not represent the stand of this publication.