SEBI Guidelines On Extended Market Hours And Its Impact On Traders

SEBI Guidelines On Extended Market Hours And Its Impact On Traders

By Nitin Thapar

In a historic move, Securities and Exchange Board of India (SEBI) has approved extended hours of trading time in equity derivatives contracts by more than 8 hours. Currently, the trading hours are from 9:15 am to 3:30 pm which might be set to be revised till 11:55 pm in the night from October 1st 2018.

“With a view to enable integration of trading of various segments of securities market at the level of exchanges, it has been decided to permit stock exchanges to set their trading hours in the equity derivatives segment between 9 am and 11:55 pm, provided that the stock exchange and its clearing corporation(s) have in place risk management system and infrastructure commensurate to the trading hours,” SEBI said in their circular.

The nod from SEBI does not mean that the time window extension will go through. In order for it to be effective the stock exchange (NSE and BSE) has to implement and scale up as per the requirements.

In comparison to other exchanges around the world, interestingly, only Frankfurt Stock Exchange is open for 12 hours i.e. from 08:00 am to 08:00 pm and all other exchanges in the world operate for 5 to 6 hours based on the country’s working hours.

Trading hours of some of the world’s major stock exchanges:

Trading hours of some of the world's major stock exchanges

Coming to the point, what impact will this decision have on the markets and the traders?

Impact on market and traders

1. Indian markets to be in-line with international markets

The Indian market will come in line with international markets (especially Asian markets) but the volume may get scattered at different time slots which may cause lesser trading depth at the initial stage.

Ashishkumar Chauhan, MD & CEO, BSE says “the introduction of the extended hours (in India) is a positive development and will bring Indian market in line with international markets.”

2. Brokers need to adapt to this new change

Brokers will have to amend to these extended trading hours by changing the current policy of execution, risk management, requirement of additional resources can be witnessed to cater longer trading hours and more such changes can be expected but with a benefit of higher trading turnover.

3. More opportunities for investors

Greater opportunities for investors (mainly automated traders who perform bulk orders) to hedge markets risks beyond the regular trading hours.

“If there are any events that happen after close of cash markets in the Indian context, it still provides an opportunity for Indian investors to hedge their risks.” said Vikram Limaye, MD & CEO, NSE

4. Change in impact from foreign markets

There will be a reduction in drastic effect on the Indian markets from the news and events happening in the foreign markets. Unlike before when the market displayed an extreme change in the trend on the opening of a new trading day, following the occurrence of major events in the foreign markets

5. The volatility distribution

Market volatility will be distributed over a longer trading period. Discretionary traders who were banking on cases of high volatility may have to change their strategy or opt for automated trading since the volatility will be stretched over longer trading hours.

6. Increase in number of foreign investors

Increase in liquidity can be witnessed since the extended trading hours will attract foreign investors. This also means that the traditional traders have to up their game since they will be competing with traders who have experience of multiple markets, the “gap-up” or “gap-down” situations.

7. Multiple trading sessions

This also brings in an opportunity for multiple trading sessions (though not yet proposed by SEBI) that can be leveraged by some retail traders and almost all the automated traders by reforming their trading strategies during breaks in these sessions.

8. Fair price for derivatives

Since a lot of Indian derivatives are listed in the foreign markets an increase in trading hours can help with fair price discovery for these derivatives

9. Other factors

Last but not the least, this can also mean increase in stress, longer working hours and need to improve efficiency for retail traders. Brokerage charges will go up to cater to the longer working hours and cost to upgrade technology which is to be borne by these brokers.

There has been a mixed reaction to this decision and not all may agree or disagree with this change. What is important is that how you as a trader can make the most out of this opportunity.

Things to consider before trading in extended hours

1. Automated trading

With increased time at desk, it can become stressful for a retail trader to monitor and analyse markets with sole discretionary practices. Automated trading can be the way forward where algorithms can be used to react to the changing market situations without getting carried away by one’s emotions in these longer trading hours situation.

2. Learn to compete

With more investors entering the market (Indian and foreign) the competition will rise and so will the need for new techniques to have an edge over other investors. There will be a need to upgrade your strategies and benefit from the real-time volatility changes by making the machines trade for you. You can leverage from multiple learning opportunities that can give you the required edge.

3. Leverage from the career based opportunities

There is no doubt that there will be an increase in requirement for skilled resources. Institutions will be looking out for talents that can bring in experience and skills to cater to their needs. It is the right time for the traditional traders to upgrade their skills which can help them get better opportunities to join the next generation’s league of algorithmic and quantitative traders.

4. Skills that can help you win

With volatility splitting over longer trading hours, strategies that work on bulk orders will play a key role and advanced techniques (e.g. sentiment analysis, backtesting, forecasting etc.) will help you to brace the impact of changing market scenarios.

We will have to wait for the exchanges to implement and be ready with the required changes as per the conditions laid by SEBI which requires an efficient risk management system in place and infrastructure readiness. But as an investor you can take a note of the points mentioned above that can help you to get started.