The National Stock Exchange’s (NSE’s) decision to extend trading hours in interest rate derivatives has divided opinions among brokerages and market participants regarding implications on the industry. The exchanges also have the mandate to extend trading hours in derivatives till 11:55 pm and till 5:00 pm in the cash segment.
Dhiraj Relli, MD and CEO of HDFC Securities, said there will not be any significant rise in volumes, given that the lion’s share of volumes is recorded usually during the first and last hours of the session. “Bulk of the volumes that used to come at 2-3 pm will now come at 4-5 pm,” he said, adding that stocks with low volumes will face higher volatility. Further, this will have more of an impact on terminal brokers instead of online ones, given involvement of various costs.
“The objective of the NSE is probably to bring volumes that have shifted offshore back onshore. But, the exchanges have to work with clearing corporations first to ensure robustness of the system,” he added.
Relli said longer hours will only add to the stress on traders and brokerages, and there would only be a partial overlap with European markets, and close to nil with US markets. This, according to him, doesn’t really serve much of a purpose.
The readiness of the ecosystem should be first looked at, say brokerages. A senior executive of a research firm said brokerages and traders have to be given time first. “The industry is still adapting to the T+1 settlement system, and this is too quick a development when the dust has hardly settled,” said the executive, who did not wish to be named.
Others say constant evolution in the regulatory landscape over the last one-and-a-half years has brought changes to operations and technology.
Anuj Shah, chief business officer of Axis Securities, said: “It is crucial to see trading volumes in the extended timings, as low volumes may cause erratic moves on either side. We need to see how settlement and bank obligations work out with the extension. Exchanges/depositories and banks must come together to ensure a smooth and successful transition. Low brokerage yields and high operating costs may make it difficult for small and regional brokers to sustain if volumes don’t surge.”
What the industry agrees on is that a higher cost of operations that will follow longer hours will be the biggest overhang.
According to 5paisa CEO Prakarsh Gagdani, while extension in hours benefits traders by giving them a wider window to factor in international cues, it will come with higher expenses as there will be costs involved in running all related activities. “Costs pertaining to technology, risk management, operations will all surge,” he said.
While the exchange has only extended trading in interest rate derivatives, brokerages say any further extension will come with additional challenges. Reduction in time for settlement will be a major disadvantage facing brokers, given that regulatory requirements have only increased.
Gagdani said early pay-in, MTF settlement, etc will get crunched. “There will be pressure on the system for post-trading activities. Currently, we get a window from 5:00 pm to early morning the next day to complete operational processes and reporting. This could narrow down to just a few hours in case of longer trading hours.”
Extending trading in the cash segment to 5 pm and derivatives till midnight, as is being discussed, will double processing in derivatives, and lead them to be clubbed with the commodities segment, thus pushing up costs and delays, Gagdani pointed out. While longer hours will mean better business, revenues will rise by 15-20% at the most, which won’t be enough to offset the higher cost impact, he said.
Relli, too, pointed out that longer hours will not only lead to volatility in shares, but also adversely impact mutual funds. “Funds have to declare net asset values or NAVs end of the day, which will then be declared only later in the night, thus upsetting the system.” He suggested that the exchanges should start with only index futures, as that would give traders the opportunity to hedge their positions, long or short. “However, any extension in the cash segment will lead to higher impact costs and a decrease in depth.”