Longer the trading, stronger for markets

Indian stock exchanges are giving up business to foreign counterparts by restricted trade timings. This can be rectified through a suggestion recently made by National Stock Exchange CEO Ashish Chauhan for longer equity trading hours. A larger window for trading should increase market liquidity, allow domestic financial institutions to engage in hedging, and improve sentiment for retail participation. The proposal also has a bearing on after-hours price discovery. The Securities and Exchange Board of India (Sebi) allows exchanges to offer extended trading hours for equity derivatives on the lines of facilities provided to commodity derivatives. The regulator is also shifting the trading cycle to T+1 in an effort to enhance liquidity.

Resistance to the idea emanates from market intermediaries that have to bear the costs of the switch. The regulator and the exchanges need to drum up support for a move that has immense long-term benefits for India’s financial markets. Technology is pushing financial markets towards real-time settlement in a continuous cycle, and India could offer compelling trading platforms by accelerating the process. India is afflicted by a traditional aversion among retail investors to ‘risky’ asset classes like equity. There are, however, recent signs of a broadening of the market. Shorter trading cycles and longer hours widen the funnel for household savings to flow to the most productive segments of the economy.

Indian exchanges punch below their weight also on account of weak engagement with global capital. They are losing business to exchanges like Singapore, which uses prices discovered in India to generate considerable trading volumes. Given the size of India’s GDP and growth of financial intermediation, the country’s bourses need to position themselves to claw business from foreign competitors. As India’s stock market capitalisation grows in line with its GDP, the financial system needs to build capacity to handle larger international capital flows. Trading stocks for longer will certainly help.

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