Sebi’s decision to let exchanges increase trading time limit seems to be a step taken in a hurry

Regulators are expected to arrive at decisions after due deliberation as these often have a long-term structural impact on the sector they are meant to regulate. But Sebi’s decision to let stock exchanges increase the trading time limit in the derivative segment, by keeping them open from 9 am to 11.55 pm, up from the current time limit of 9 am to 3.30 pm seems to be a step taken in a hurry without understanding its long-term implication. This is at cross-purposes with Sebi’s stated stand on curbing excessive speculative activity in the derivative segment of the capital market. A couple of weeks back, Sebi had issued a circular where it mentioned that over a period of time it would make the Indian market move towards physical settlement even in a derivative segment, which meant that volumes in that segment would have come down. In the last couple of months, Sebi has made its intentions clear by asking exchanges to increase margins which are paid by traders to exchanges before they can take exposure to any derivative trade – so that excessive speculation by paying a small amount of margin money is curbed. It has also asked brokers to collect income-tax returns of investors who trade in the derivative market so that it can be judged, at this point of time by brokers themselves, whether an individual investor has the financial strength to deal with derivative instruments. This is being done so that there is some relationship between the income and exposure that a trader is allowed to take in derivative instruments. So, while on the one hand every effort is being made to ensure that only people who have the wherewithal to take risks should enter the derivative segment, on the other hand, the time limit for derivative markets is being doubled from the current seven and a half hours to fourteen hours and 55 minutes. When the market is open for a longer duration, speculative volumes in the derivative segment are bound to increase and not come down. Traders would be tempted to take positions around the time when the US market is about to open and also around midnight when trading would be about to close in India. Now, most of the time those positions would be taken for next-day trade, but even after extended time, the Indian market would close for trading one-and-a-half hour before US market finishes business for the day. There have been times when the colour of US market changed from green to red and red to green in the last one-and-a-half hours of trading. What happens to all the trades taken under the impression that what is happening in the US at night would be repeated in the Asian and Indian markets in the morning. If it is not repeated, it would lead to a situation where volatility in the Indian market would increase sharply when markets open for trade next morning. Why bring in an additional element to volatility in markets when it is well known that lower the volatility the better it is for every stakeholder in the capital markets. Essentially, markets that are less volatile tend to get higher valuations. In fact, in the case of exchange trade funds that are following nifty or Sensex as their benchmark, the volatility would hurt them a lot. Our policy makers should not forget that a large part of domestic money coming into markets is going to index funds. If index become volatile, flows to these funds would come down which is long-term negative not only for the Indian capital market but the economy as well. Hence, the argument that Indian investors and traders would be in a position to react to any major global development when the US market opens for trade is a flawed one. Yes, it would help foreign investors who would be able to trade in Indian indices as per their convenience instead of placing overnight orders to their Hong Kong or local desk in India. It will probably help some large brokerages, which in any case keep a section of their offices open till midnight for commodity traders and surely also stock exchanges that will earn more money with an increase in volumes. However, to the question whether there would be positive outcome for investors, the answer is ‘no’. The stock markets are primarily for investors and not traders.