We have all heard about the quintessential “market hours” during which the stock markets are open and operational. The bustle of stock trading activity during the market hours is indeed unparalleled. However, with the pervasive use of technology in stock trading, there has been a push for extended hours trading. Electronic trading and communication have facilitated the option.
But first, what is extended trading?
Extended trading hours refers to stock trading that happens before or after the set trading hours. Global markets follow extended hours. These include the pre-market and after-hours, which are respectively before and after the regular trading hours. In the United States, pre-market trading hours are between 8:00 a.m. and 9:30 a.m. Eastern Standard Time (EST), while the after-market trading hours are between 4:00 p.m. and 6:30 p.m. EST.
Extended trading hours- the India story
Globally extended trading hours are followed in influential exchanges, and so is the case with Indian markets. Traditionally, they operate between 9.15 a.m. to 3.30 p.m. However, the markets operate on special pre-announced days during non-market hours and holidays.
The Indian regulator Securities and Exchange Board of India (SEBI) had initiated the facilitation of extended trading hours to bring the Indian market in line with the global ones. Moreover, brokerage firms operate in after-market hours already as one can trade in commodity markets until midnight in India.
However, there is still a consensus to be reached on the part of the exchanges. The individual exchanges need to send proposals to SEBI outlining various risk mitigation measures and many practical aspects related to regulating the extended trading hours system. For example, what would be the cost-benefit analysis of such a move? Would the income also increase as a consequence of increased timing? Is this a need for the market? Are we merely following global practices that may not benefit us? Would this also require an upgrade in the banking system of domestic banks? These are some of the issues that need clarification in the Indian context.
Benefits of extended trading hours
Faster Response: As we know, the markets are quite responsive to current news and events. These often determine the mood of the market and set the tone for things to come. Extended trading may give traders an advantage to react faster to the news and events than would be possible within restricted trading hours. Some companies release quarterly reports and earnings reports outside of trading hours. Traders would be able to react immediately to business news such as these. In a sense, it is like capitalising on the first-mover advantage.
Convenience: Several investors who are not full-time traders, miss out on investing in the stock markets because of its restricted hours to place and execute orders. Extended trading could provide added convenience to these part-time investors to set more trades and capture higher profits.
At par, globally: Such extension would help Indian markets be at par with their global counterparts. Indian markets are influenced by global markets, especially NASDAQ & DOW, and the reverse is also true. Given the interdependent relationship, traders would benefit from the extended trading hours that overlap with global stock exchanges. This measure would also draw larger investors who participate in global markets towards a synced Indian market.
Avoid Losses: Extended trading hours could also help investors plug losses by using this window to exit a losing position before regular trading begins.
Capture Market: Despite the volatility, some traders may get shares at attractive prices. This trend is visible in the case of stocks that are impacted by news events. Traders can leverage the extended trading hours in such cases, instead of waiting for the next working day to take a position.
A few things investors must note regarding extended trading hours:
– Individual brokers may have their policies for after-hours trading, and it would be prudent for the investor to be aware of the same.
– Currently, the volume of shares traded in the extended trading hours and the number of traders who trade during this time is less. Hence, one could expect more volatility due to the lower trading activity.
– The opening price of a share in the stock market may not necessarily be the same as its closing price in the after-hours market. Moreover, the share prices of a specific stock during the extended trading hour may not reflect that same stock price in the regular market hours.
– Individual buyers would be more likely to deal with institutional buyers, which puts the former at a disadvantage. Institutional buyers would have a competitive advantage, such as access to more current information, as well as more capital and resources.
– If the market reacts to unfounded news or rumours, it will negate the first-mover advantage. Additionally, significant news events and stories would also lead to fluctuations in the share prices. In short, the environment would be more prone to more significant price fluctuations.
While there are several benefits to extended trading, investors must be cautious of the downsides and volatility that come with it to minimise risks and maximise returns.
It remains to be seen how Indian exchanges align with the global markets by using extended trading hours. Indeed, this is something that will require traders to come out of their comfort zones. However, as the Indian economy moves ahead and gains momentum, it is best to have a level playing field with the world!
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