The proposal of extended trading hours will increase the costs for brokers and, by extension, for their clients.
Shockingly enough, the Indian Stock market regulator, the Securities and Exchange Board of India (SEBI) on Friday May 4, 2018, announced that the stock exchanges in the country will be allowed to extend the timing for trading in the equity derivatives till 11.55 pm, with effect from October 1, 2018. Currently, such trading is allowed only between 9.00 am to 5.00 pm. The actual trading hours, however, are only till 3.30 pm. SEBI also added that, for the stock exchanges desirous of extending trade timings, beyond the extant trading hours, its prior approval shall be sought, along with a detailed proposal, including their framework for the risk management, their settlement process, their monitoring of positions, their availability of the manpower, their system capability and their surveillance systems.
SEBI’s proposal to the stock exchanges in the country is absurd in both logic and the facts of the matter. For one thing, such long trading hours will necessarily increase the costs to the brokers and ipso facto, to their trading clients as well. The increased trading costs will obviously affect adversely the liquidity of the markets, as that will drive away from the market the jobbers and the day traders, who together create the bulk of the liquidity in any equity derivative contract. In fact, the reduced liquidity will tend to further increase the transaction costs, and this vicious circle will continue ad infinitum, to the detriment of the efficiency of the market for either risk management or price discovery.
To tell the truth, the efficiency of any derivative contract, be it in equity or commodity, or their indices, essentially depends on the volumes of trading in them, which not only decreases the transaction costs – especially the bid and ask price spreads – but also enables the markets to absorb both the risk management and speculative bids and offers, with the minimum possible change in the market price. The liquidity also tends to strengthen the competitive forces in the market. Higher the liquidity, larger is the competition. Larger the competition, higher is the competitive benefits.
For, competition is the critical driver of performance and innovation. It benefits everyone by enabling us to choose from an array of excellent products at affordable prices. Competition also encourages the adoption of innovation as businesses evolve and new ideas flourish in the marketplace. Competition is not in any way enhanced by the lengthening of the trading hours in equity derivatives traded in the stock exchanges of the country, but it would be actually reduced considerably to the impairment of the efficient functioning and efficacy of those exchanges, in performing effectively their crucial economic functions of, among others, serving as a barometer of the growth of the economy in general, and the organized industry and the services sectors in particular.
Contrary to the reported statement that globally, the derivative exchanges are already following the extended trading hours, the trading hours at most major exchanges in the world don’t exceed nine hours. Thus, the trading hours at the London Stock Exchange are from 8 am to 4.30 pm, i.e. eight and half hours. Both the New York and NASDAQ allow trading for only six and half hours, from 9.30 am to 4 pm. So is the case with the Toronto Stock Exchange in Canada. The Tokyo Stock Exchange is open on the working days from 9 am to 3 pm, i.e. just six hours. The Euronext Amsterdam is open for trading between 9 am to 5.40 pm, eight hours and 40 minutes. True, the day light trading hours in winter in North America and Europe are slightly different, but the total trading hours are still not more than 8-9 hours.
Why on earth then is SEBI proposing long trading hours for the stock exchanges in India? That will only reduce the liquidity in the market at any given time, and make it susceptible to erratic and wide price fluctuations, to the detriment of its economic utility, to not only the risk management traders and the speculators of all the hues, but to the economy at large. The stock exchanges will then cease to be the barometers of the economy. By extending the trading hours of the stock exchanges in the country, is SEBI interested in increasing the price volatility in the securities markets so that it can use its regulatory powers mercilessly against both the exchanges and the market players trading in them?
Verily, SEBI should desist from implementing such an absurd proposal. Concentrated trading for a few hours, and not spread out over long hours, is necessary for effective and efficient functioning of stock exchanges in the country.
By Madhoo Pavaskar, director, Research & Strategy, 63 Moons Technologies Limited. Views are personal