More money with mega trade

Taking stock: Our bourses will integrate with Asian and European marts

Now that the market regulator Securities and Exchange Board of India (Sebi) has allowed domestic stock markets to extend the trading hours for shares by two-and-a-half hours, the Indian stock market will soon witness longer hours, expectedly higher volumes and more money for different segment of players.

About ten days ago Sebi announced that in consultation with the stock exchanges and other market players, it has decided to permit the stock exchanges (SEs) to set their trading hours (in cash and derivatives segments) between 9 am and 5 pm. Currently, trading on major stock exchanges takes place between 9.55 am to 3.30 pm.

Apart from granting extra two-and-half hours of trading time, Sebi’s other condition is that the stock exchanges have to put in place a risk management system and infrastructure commensurate with longer trading hours.  

Euphoric response

Major stock exchanges in India are overjoyed over Sebi’s move intended to boost revenues for bourses, at a time when the transaction charges are low. Both NSE and BSE have welcomed the move saying they would soon extend trade timings. There are enough reasons to be excited. Extended trading hours, firstly, will help Indian bourses integrate with Singapore and other Asian markets in the morning hours, and to some extent with European markets in the evening.  “As the markets are linked globally today...extension of timing will help traders take appropriate positions based on global developments,” says former Sebi Chairman G N Bajpai.

Experts believe that as soon as extended trading hours come into force, the quick impact will be an increase in volume of trade, by about 10 to 15 per cent — a gain of around Rs 12,000 crore on the average turnover of about Rs 85,000 crore a day.  

Mixed reaction

Yet, market intermediaries ranging from broking houses to banks, mutual funds and FIIs besides retail investors have mixed or divergent views over the benefits of extended trading hours. Apart from bourses, the other happy-lot were business channels who expect an incremental rise in their advertisement revenue with the extended live market coverage.

Retail investors: From the perspective of retail investors, the move gives them a better chance to react to global developments as well as corporate changes. They get more time to track their portfolio and even book trades — including cherry picking of the right scrips — after finishing their regular work or much earlier before they go to work.  Lopamudra Sinha, a music teacher in Lok Puram Public School in Mumbai and an investor says: “If markets open up early at 9 am, it gives me an hour or a little more free time before going to school to watch market movements and helps in taking some investment decisions at times, if not regularly.”  A discussion paper on the topic put out by Sebi earlier had pointed out that extending market hours would help investors react in a timely fashion to global news and help India match international standards and practices.

Traders: Now lets look at it from ther point of view of traders. For a day-trader who always squares off his position during the day, it no doubt gives more opportunities to trade. But whether he will make more money will depend on the accuracy of his calls and not on trading hours.
If he is in the habit of overtrading to recover the loss, he might end up loosing more for another two-and-a-half hours. In terms of volumes, Hemant Gupta, independent market analyst says half of the day’s volumes comes in the first and last hour of trade, as such “the middle ground will be more widely dispersed.”

Mutual Funds: Mutual Funds already see some nervous movements over the prospect of extended trading hours that puts an additional pressure to them as well as custodians to meet the daily deadline to submit the net asset values (NAV) of equity schemes. As per the existing norms, the NAVs have to be uploaded on the Association of Mutual Funds of India (Amfi) website before 9 pm on every working day. 

While custodians — who manage the back-office operations of MFs — just about manage to meet the deadline at the moment but with the extension of trading hours it will become much more difficult considering the intensity of quality checks that need to be followed. Also, MF’s will have to spend more for setting up new systems and hiring more people. And this will happen when their business has already been hit with the ban of entry-load clamped by Sebi in August this year.

Market intermediaries:  While stock brokers are getting ready for extended trading hours, some feel the move will throw up administrative challenges as it would increase the workload of brokerages and put their existing infrastructure under strain.

 “We are used to extended trading hours since the commodity market is open for a far longer time than the equity now… as such the decision is unlikely to make any material change in the trading pattern. It (Sebi) should have provided for a window linking Indian market timings with that of the US to derive wider benefits, ” says Angel Broking Chairman and Managing Director Dinesh Thakkar.
Asit C Mehta Investment Intermediates Managing Director and former President of BSE Deena Mehta,  avers: “It is likely to affect the present culture of studying various factors that influence market behaviour, before the start of trading. It could also encourage undesirable speculation and day-trading, more than orderly investment. Also it may add to employee fatigue and curb devotion to market analysis.”

 Portfolio Manager P N Vijay describes Indian market a bit weird, which for the first half of the day reacts to Hang Seng and Shanghai bourses, and the second half to what Dow futures, FTSE and DAX doing. “So if we have these long trading hours, I think the volatility would come down which according to me is the only plus point in this whole move.”Nirmal Jain of Indian Infoline opines that Sebi may ostensibly have a broader purpose of aligning with international market in terms of timing.

But there was some apprehension that lot of market volumes from Indian markets are going to Singapore Nifty, which opens earlier. It is presumed that now with domestic bourses overlapping with the Europe and Singapore markets will make our volumes grow faster. 

Further, brokers would be hard pressed to send contract notes, which are confirmations of trades carried out during the day, within the allotted time of 24 hours.

Also transfer of funds through banking channels might also be a problem, as the real time gross settlement (RTGS) system is currently available from 9 am to 4.30 pm, which is half-an-hour short of the permitted extension for stock exchanges.

Banks’ role:  Is the banking system adequate enough to cope with extended market hours?
Bank of Baroda Executive Director, R K Bakshi, says: “As the settlement in the equity market is happening on a T+2 basis, there is no reason why banking system will not support the extended trading hours.  Our technology platform is strong and can extend RTGS slightly to 5 pm as and when Reserve Bank of India  allows it.”

But another PSU lender, Bank of India has ruled out the possibility of extension of its working ours in the event of bourses extending trading hours.  “We are already overstretched now. The  employees will hit us if we try to extend their working hours”, Bank of India Executive Director B A Prabhakar said.  

FIIs:  It is not clear that a dealer participation from FII (foreign institutional investors) segment would get a boost with the extended trading hours, because there will still be additional time gap compared to the closing of other Asian markets like Hong Kong, Japan and Singapore.  Some FIIs prefer to trade on Singapore’s SGX because of the lower cost of trading, adds an FII broker.  

Business channels:  Longer trading hours at Indian stock exchanges is good news for TV business channels who will get 20 per cent more advertising inventory to sell, possibly resulting in an overall increase of ad revenue by about 10 to 15 per cent, say media agencies. Currently on any given trading day, business channels get around 90 minutes of on-air advertising time for sale to advertisers. 

With extension in trading time, they will get another 18 to 20 minutes more on trading days.  Whatever may be the benefit, most broking houses will have now to put in a significant amount of work in their back-offices and risk management offices. A broker needs to make a tie-up balance on the same day after trading shuts, as he needs to know the client’s dues the next day to carry out the follow-up activity of collecting money and margin balances.

For this, most brokers need to beef up their infrastructure and increase manpower as a result of more trades and increase back-office strength, all of which may not be offset by surge of increased revenues.  
Optimists in broking community like Thakkar of Angel Broking disagree. “The cost escalation would be offset because of additional revenue stream that we will get,”  he said.

He looks forward to numbers where growth in bottom-line is better than top-line. In the US, you don’t have to go through exchanges because certain markets are beyond exchanges too. Optimists foresee that things will move in that direction and all players will get used to it and our systems will get tuned to it.


Pros & cons

Gains

*Global events will be discounted effectively as Indian bourses will be aligned with Asian and European markets
* Extra hours will increase the volume and value of stock trade
* Retail investors can use non-office hours for relaxed stock picking
* Brokers and mutual funds will get more time to research before the actual trade
* FIIs will be able to better integrate their trade in India with other markets
* Additional revenure for TV business channels

Pains

*Administrative and compliance challenges for MFs and brokers
* Their cost on manpower, infrastructure and risk management will go up
* Investors will have to keep an watch on Asian and European markets for longer time
* If banks do not extend working hours financial compliance will suffer