Will longer trading hours on NSE F&O really add value to traders?

The SEBI and the stock exchanges are now veering towards longer trading hours for equity and F&O. The plan is to extend the cash market trading till 5 pm and F&O market trading till 11.55 pm, almost on same lines as commodities.

What is the reasoning?

The SEBI and the exchanges have a very simple answer to this question. The longer trading hours would mean more hedging opportunities in India, as more time zones would now be covered. This will prevent the export of F&O hedging to other markets and instead it will stay in the Indian market only. In that sense it will ensure that the domestic volumes of F&O would get a boost. Also, longer trading hours would involve more F&O traders, especially among the younger crowd, who can trade post work hours.

But, there are downsides too

Things may not be as simple as it appears. Firstly, trading for six hours by itself is tough and extending it would put more pressure on traders. Most of the F&O and short term traders have to be around on their trading terminals to ensure they don’t miss out any trend. Just imagine a trader having to spend nearly 9 hours as a cash market trader and about 15 hours as an F&O trader. Even a person like Nithin Kamath of Zerodha admits that the pressure it can impose on the traders and their lifestyle would be immense and hard to handle.

Bigger back office issues

There are larger back office issues. Today, the Indian markets are on T+1 settlement model for cash and F&O. In the new system, the back office has to start the settlement and clearing only after trading is completed. The issue is a lot more prominent for global centers for India F&O trading like Singapore and Hong Kong. These countries are 150 minutes ahead on the time zone. For them, settling cash market and F&O trades would become really complex. It may be recollected that even last time around when the SEBI had proposed to extend the trading hours, objections had come in from the global India traders. The reasons are not very far to seek.

Learning from commodities

What is the experience of the Indian commodity markets. Commodity futures trading has been happening till 11.55 pm for a long time now. However, the volumes are still struggling to reach the peak volumes achieved in 2011. In the case of commodities, the volumes fell after CTT was introduced and has never regained since. In equity F&O, the boost to volumes came from options after the brokerage rates and STT were charged on premium than on notional value. The moral of the story is that extended hours of trading may not be the answer. It is not too clear at this juncture if the benefits of such a move would outweigh the costs it will eventually entail.