HOW WILL EXTENDED TRADING HOURS LOOK LIKE?

In may 2018,

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SEBI gave its nod to extended trading hours for trading in equity derivative segment to up-to 11.55 pm from 3.30pm now, in line with the market timings in the commodity derivative segment and also to keep up with the global practices surrounding the financial markets. The exchanges were asked to frame a plan for implementation and apply for approval to the market regulator.

Last month, India’s largest stock exchange started sounding confident on making this a possibility. In a mail to its members the National Stock Exchange Ltd. asked its clients to get ready for late-evening derivatives trading from October”NSE plans to start extended trading subject to approval from the regulator some time in October.”

A “skeletal framework” for trading till 11.55 p.m. was also shared

According to the framework:

  • There shall be two trading sessions with a break of about 60-90 minutes
  • The first session would be between 9:15 a.m. and 3:30 p.m.
  • The second is expected to start at 5:00 pm after the break.(a separate circular to confirm the time will be issued by the exchange after approval)
  • Any orders left open post 3.30pm during the first session will stand cancelled (meaning if you have open orders after the end of session-1, it DOES NOT mean it will remain valid during session-2.)
  • Fresh orders will have to be placed for session 2 and order modification will be allowed till 11:55 p.m. All outstanding orders after that would be cancelled.
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With so much going on, it can be assumed that this will become a reality very soon. NSE remains confident to start extended hours trading from October.


So, what exactly is extended hours trading and what kind of trading to expect during these hours?

Extended trading is trading conducted by electronic exchanges either before or after regular trading hours. So, the pre-market open also comes under extended hours trading.


Now, to understand what kind of trading to expect during these hours. The only option we have is to look at global markets where such extended hours are currently in practice.

After studying about it and following market action during extended hours in USA. I can help you get a taste of what is likely to happen.

tradingafterhours-599630720d327a00114e9963

These hours felt like a tourist place. Loaded sometimes. A ghost town Off-Season.

Before discussing what to expect and what not to expect lets just understand something with a little example.

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Imagine you are a merchant and you know about 2 market places to do business at-

  • The first one is open for a limited period of time say 4 hours everyday from 2pm to 6pm.
  • The second opens at 6am in the morning and remains open up till midnight.

So participants wanting do business with each other know that the only way to do business in market place-1 is to do it between 2pm-6pm. So it does not matter in which part of the country the merchant lives he must be there between 2pm-6pm if he wishes to do business. This makes the area fully loaded during these hours. When everybody is present, what happens?

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Well, each merchant enjoys,

  • VARIETY, as all merchants from all parts of the country are present he can enjoy a wide selection and find exactly what he requires.
  • REASONABLE PRICE, no merchant can manipulate prices in his favor. Well because he is not the only one present there right.
  • NO-MONOPOLY, what happens when one merchant does not agree with another on price or quality. Will he have to adjust? No, he will simply go to another as there are so many.

On the other hand,

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Market place 2 will not enjoy those benefits. Say- a merchant reaches the market place-2 at 9pm and finds out that there are very limited merchants present there at that time. He will have no variety, unreasonable price and may be sometimes a big merchant simply bullies his way to get an unreasonable price from him.

The_Three_Merchants

Sure, there is one benefit, Suppose, he bought 20 units of XYZ goods which are perishable from market place-1 but later realized that his partner in business did the same that day. The goods being perishable makes it certain that they are going to suffer losses now that they have more quantity with them than they can sell.

So, instead of panicking they decide to go to market place-2 and try to fix the problem. They will now be ready to take a bad price too if they have to, as they just want to get out of the problem.

THE SAME APPLIES FOR EXTENDED HOURS TRADING TOO

So after analyzing global markets i am sharing with you what i think should be expected-

  • Do not expect all contracts to trade during these hours. Some may even freeze.
  • The trigger for movements will be earnings announcement and only ‘unusual’ movements in global markets and commodities(for selective contracts). Notice when i say ‘unusual’, Not every move in the global markets will make things move during extended hours back home.
  • I found that brokers do not provide an option for market orders (because sometimes these are not even possible due to thin liquidity) during these hours. So there is a high chance only Limit orders will be allowed.
  • Its possible that the brokerage structure for these hours differs from your normal brokerage plans (eg. you require to pay something extra to enable your account to function during extended hours). Apparently In USA, only one broker (Robinhood) allows free extended hours (or after hours) trading.
  • After talking to few traders abroad i realized that some of them had no knowledge about ‘extended hours’ until the stock of Facebook crashed during extended hours after they announced earnings recently. It shows us that the affect of these hours won’t be very significant unless there is a big trigger.
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EXTENDED TRADING RISKS

  • Limited Liquidity: Extended hours have less trading volume than regular hours, which could make it difficult to execute trades. Some contracts may not trade at all during extended hours.
  • Large Spreads: Less trading volume often translates to wider bid-ask spreads, which could make it hard to execute orders at favorable prices. Say you wish to buy ABC Futures at 556 but the seller wants 560. Yes that’s how wide the spreads can be during these hours.
  • Increased Volatility: Less trading volume often creates an environment for greater volatility given the wider bid-ask spreads. So basically a large order can plummet the price to a large extent or take it to the moon. But hey even if you get on the right side it won’t be easy at all to close. During earnings announcement you get huge moves. Bigger moves than you would expect during regular hours because a handful of orders can move the prices significantly but you will notice the volume dries up again very quickly after the move gets over.
  • Uncertain Prices: The price of contracts trading outside of regular hours doesn’t reflect the price of the same contracts during regular hours. So its possible that sometimes when volume comes back next morning, there is no affect seen from the action last evening.
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So, speculators don’t get excited about this being a license to over-trade.

11248554-illustration-of-a-crazy-trader-going-sick-with-money-on-his-computer

(picture by 123RF)

CONCLUSION

The developments going on for our financial markets should be welcomed. The exchange can help bring traffic from Singapore back to home and also attract fresh foreign participation as we get in line with practices followed globally.

Its possible that during the first month after this type of trading gets started the markets experience normal volumes (everyone would be participating to get a taste at least once right) but they will eventually shrink and these hours will never experience anything like regular trading hours.

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For traders, opportunities will be there during major events like earnings announcement but other than that trading during these hours would be more like driving in a ghost town. So, don’t welcome this change as a license to speculate more. I would advise you to stay away from speculating during these hours and only use this time to either Hedge during an unexpected event or at the maximum work out an earnings trade. There is no point in treating these hours as regular trading hours. Nevertheless analysis of market action during after hours might prove to be gainful for short term traders and analysts.

Do leave a comment and share what you think about this.

Thank you for reading.
By
Animesh Vashisht
Mob. +917906818121, +91-7536807363

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7 thoughts on “HOW WILL EXTENDED TRADING HOURS LOOK LIKE?

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  1. Hello wanted to know what about option writers how they will be trading who basically wants to earn theta part so are they going to wait till 11.55 to earn that premium??

    1. Thats a good question.
      As i said unless there is big trigger like earnings announcement post 3.30pm. There will not be one good reason for a trader to play around after hours. Not even for theta.
      If you ask me i don’t think it will be even possible to conduct stock options trading after hours due to no liquidity and risk.
      The first month can see participation as mentioned in the article but post that you will see no interest of a regular trader in after hours session.

      So if you sell options intraday nothing much will change for you

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