Extended Trading Hours Help Volumes, But Do They Aid Hedging?

The probability of longer trading hours has visited the country multiple times in the last few years. As a journalist who talks on stock markets, I have dreaded the prospect of being on air at 8 a.m. and ending the day at 5 p.m., because coupled with the transit time in a city like Mumbai as well as the time that it takes to get ready for talking sense, it effectively would make my day a 13-hour work day at the very minimum. And much like a newsroom employee, an employee in a brokerage or other financial participants would think alike. Are there merits, though, in the argument around longer trading hours making the markets more efficient? Let's talk about this, since examining this topic is, well, difficult and contentious.

The current trading hours are what they have been for the last 12 years or slightly longer than that. Yes, for the uninitiated, the equity markets used to start at 10 a.m. in this century itself, before the timing was changed to 9 a.m. in 2010. So currently, active trading takes place for about 6 hours and 15 minutes in India. Compare this with global examples, and there is no definitive block. If Shanghai trades for about 4 hours, Frankfurt trades for 14. And others like London and New York are wedged in between. The probable trial balloon floating currently seemingly proposes taking the closing time longer by 1 hour 30 minutes till 5 p.m., which means the markets will trade for 7 hours and 45 minutes.

What about back home? The sister concerns like the currency derivatives market and commodity markets trad for a longer duration, with the currency markets already trading from 9 a.m. to 5 p.m., and the commodity markets already trading for nearly 15 hours, from 9 a.m. to 11:55 p.m. So, some part of the trading fraternity is already used to a market segment which trades for much longer. And the arguments in favour of longer trading hours are not entirely implausible.

Proponents say that markets which have longer trading hours tend to be better able to hedge the risk arising due to global information flow. NSE chief Ashish Chauhan is apparently on record saying that multiple exchanges in the developed world trade for longer hours, so why should Indian markets not do the same. There is also this opinion that the current trading hours in India have resulted in volumes shifting to offshore markets, with the SGX being cited as the most evident example.

The issues with these assumptions and proposals though, are multiple. The current proposal (or at least the one social media is in a frenzy about) is to take the trading hours till 5 p.m. IST. It seems unlikely that a 1.5 hours extension would be a major help in hedging risk due to global information flow. This is so because till date, world markets react strongly to what happens in the U.S. markets, which start trading at 7 p.m. IST. In which case, the extension till 5 p.m. does not really help in hedging against that impact.

Global examples of other exchanges trading for longer hours to hedging global volatility are mixed at best, as discussed earlier, with no clear trend of longer trading hours. More importantly, longer hours can result in disproportionate increase in costs for all participants, as multiple brokers have cited at various instances in the past. Remember, the shifts need to increase if indeed the number of hours get extended substantially enough to help in hedging against global volatility and the argument around the revenues from the increased hours is not proven. Also, the health issues around very long workdays in crowded metro cities could potentially be a serious dampener.

Net net, the biggest benefit of extending trading hours could be that it will reduce overnight market risk if the hours are much longer, much like the commodity markets. However, let any proposal not come in the garb of this being a benefit for a retail investor, because retail investors will not be on the ball from 9 a.m. till late hours of trading. A couple of hours added may anyways not make much difference to the ability of Indian participants to hedge global volatility. It will increase the incomes for the exchanges, result in probable human resource issues for brokerages (as told to us by them in the past) and could be a health hazard (as Nithin Kamath of Zerodha suggested in his Twitter thread). A hedge against global volatility will certainly not be an outcome by a 1.5-hour extension. 

Niraj Shah is Executive Editor at BQ Prime.