Possible Impact Of SEBI’s Decision To Extend Agri-trading Hours In Commodity Market In India

Source

To strengthen India’s commodity market, the Securities and Exchange Board of India (SEBI) has allowed the Stock exchanges with commodity derivatives and commodity exchanges in India to extend their operating hours. This move is an extension of the efforts of SEBI to integrate the stock exchange and commodity market in India and bring them on a common platform for trading.

According to the circular issued on 30^th November 2018, SEBI has allowed the stock exchanges to extend their operating hours by an hour. The stock exchanges with commodity derivatives and commodity exchanges can operate from 9.00 am till 9.00 pm in the night. The timing for the trading of equity derivatives has been extended from 9.00 am till 11.55 pm. The new trading timings will be applicable from 1^st January 2019.

This decision is not arbitrary and has been left at the discretion of respective stock exchanges and commodity exchanges. The exchanges and their clearing corporations need to put adequate infrastructure, proper risk management systems, and robust surveillance systems.

Motives Behind This Decision

This decision by SEBI has been made to extend the commodity market in India. But according to experts, there are several other motives behind this decision as well. Let’s understand the main motives that have directed this decision.

This move will help align the currency market and equity markets with the commodity market.

It will make it easier for foreign investors to participate in the commodity trading for those commodities they have direct exposure to.

It will help hedgers and arbitrageurs trade on the platform after finishing their work in the spot market. Spot markets usually close by 5.00 PM across India.

This decision will also help establish India as the leading global trading center for commodities in India.

Advantages Of This Decision

Various benefits are expected from this decision for investors as well as brokers, such as: –

The Indian commodity market will align with the global commodity market regarding timing. It would enable the investors to deal with any unexpected shocks or opportunities in an effective manner.

The volatility in the market would also be reduced to a great extent. There are significant overnight risks to which a trader is exposed. These risks can be effectively managed through these extended timings. It will, in turn, help control the element of volatility as well.

With a wider trading ambit, it is expected that the trading volumes will also increase substantially. Those investors who are busy with their routine office work and cannot trade can now do so in the evening. It will act as an encouragement for more traders to participate in the market.

Investors can use this opportunity to hedge their risks at a later stage. This opportunity is not available now, and the investors have to look at global exchanges to hedge their overnight risks.

Possible Challenges

It is not as if this move is going to ensure smooth sailing for investors and brokers. Several challenges might impact the desired outcomes from this decision.

The foremost challenge is posed by the absence of a uniform back-end system. In most cases in the Indian market, clearing members and trading members are the same. The backend system will have to bring together the banks, custodians, and clearing corporations.

There might be instances of excessive speculation in the market due to the participation of foreign investors.

There would be an additional cost for brokers as they will have to rework their policy to manage risk, surveillance, and execution. They will have to assess the feasibility of incurring additional expenses.

There will be a possible increase in the market’s noise with the expansion of the bid-offer spread.

Road Ahead

The changed timings will come in effect from 1^st January 2019. But it is entirely up to the stock exchanges and commodity exchanges to put them into practice. They also need to beef up their infrastructure and risk management systems. They also need to inform the brokers and investors regarding the change in timings. Many stock exchanges speculate that the additional revenue expected to be generated might not be commensurate with the expenses incurred. This decision seems to be a mixed bag, and only time will tell if the expected advantages are achieved or the speculations regarding it being a risky move come true.