Sebi order on extending derivative trading: Key takeaways and challenges

The first good thing about that the entire development is that it brings the equity derivative market in line with the commodity derivative market. Both markets will now have similar trading hours, which will reduce systemic risk in the markets.

The second aspect, the extension of trading hours will result in providing a hedging facility to portfolio investors. Today, this facility is denied particularly at a time when global news drives markets. Indian markets are well connected to global developments. Investors across the globe can take advantage if the Indian derivative markets are open for business at a time when the global markets, too, are open.

The third noteworthy thing is, while the underlying equity market will work for stipulated hours, investors can hedge even after the cash market closes for business. In typical situations when the equity and derivative markets work in tandem for equal number of hours, they speculate and arbitrage with relatively less use of hedging. The extended hours for derivative markets will provide investors with this opportunity.

The fourth aspect where I find merit is that innovative structural products would emerge, paving the way for hedging. Currently, investors are trading the core equity products or the indices and are not using enough structured products for trading through the derivative market.

The fifth aspect is that the market volatility will eventually come down or get rationalised. Now, the time gap between the last day’s close and the next day’s opening is quite long. Any global event that happens post the Indian markets are closed for trade leads to wild swings or higher volatility and we see a gap-up / gap-down open. If the markets start working extended hours through the derivative segment, then the price discovery part will not have to wait for a long time. The cash markets will already know the derivative position as the price discovery would have already happened at night.

Securities and Exchange Board of India ( SEBI )