One step for­ward, two steps back­wards

Gfiles - - GOVERNANCE - ey RAMESH SHARMA

S(BI’s Gh­cisirn tr nhhS thh hquity Ghri­va­tivh marnht rShn frr almrst 15 hrurs will tanh a trll rn traGhrs anG rthhr stan­hhrlGhrs. Highhr vr­latil­ity will hn­hanch thh minGsht rf hx­chssivh sShcu­latirn, anG thh rhsul­tant grhhG in thh sr­ci­hty. Thh rhgu­la­trr shrulG havh lr­rnhG at such crnchrns, anG fr­ll­r­whG thh US sys­thm rf GiviGing thh tim­ings intr thrhh Sarts – Srh-marnht, rhgu­lar marnht, anG af­thr-marnht

Afew weeks ago, the Se­cu­ri­ties and Ex­change Board of In­dia (SEBI) is­sued a cir­cu­lar in which it men­tioned that, over a pe­riod of time, the de­riv­a­tive seg­ment of the In­dian stock mar­ket would be re­quired to do phys­i­cal set­tle­ment. This means that the vol­umes in the de­riv­a­tive seg­ment would come down. Also, the SEBI asked the ex­changes to in­crease the mar­gins, which are paid by traders to ex­change, be­fore they can take ex­po­sure to any de­riv­a­tive trade, so that ex­ces­sive spec­u­la­tion by pay­ing a small amount of mar­gin money is curbed. To make a fur­ther dent on spec­u­la­tive ac­tiv­ity in the mar­kets, the SEBI asked bro­kers to col­lect in­come tax re­turns (ITR) of in­vestors who trade in de­riv­a­tive mar­ket so that it can judge whether an in­di­vid­ual trader has the fi­nan­cial strength to deal with de­riv­a­tive in­stru­ments or not. This is be­ing done so that there is some re­la­tion­ship be­tween the in­come and ex­po­sure, which a trader un­der­takes in de­riv­a­tive in­stru­ments. All these steps were un­der­taken with the in­ten­tion of re­duc­ing spec­u­la­tive vol­umes on In­dian bourses. The mar­ket reg­u­la­tor al­lowed the ex­changes to ex­tend the trad­ing win­dow in the de­riv­a­tive seg­ment from 9 AM to 11.55 PM from the cur­rent time limit of 9 AM to 3.30 PM. The ex­ten­sion of the trad­ing win­dow, how­ever, ap­pears to be at cross pur­poses with the steps taken by the SEBI to curb spec­u­la­tive trad­ing, On one hand, ev­ery ef­fort is be­ing made to en­sure that only those who have the abil­ity to take risks should en­ter the de­riv­a­tive seg­ment, on the other, the time limit for de­riv­a­tive mar­kets is be­ing ex­tended. This ex­ten­sion of the time win­dow means dou­bling the de­riv­a­tive mar­ket du­ra­tion from the cur­rent seven and a half hours to 14 hours and fifty-five min­utes. If the mar­ket re­mains open for a longer du­ra­tion, spec­u­la­tive vol­umes in the de­riv­a­tive seg­ment are bound to in­crease and not go­ing to come down. In real life, 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 com­ing to close in In­dia. Now, most of the times, those po­si­tions would be taken for the next day’s trade, but even af­ter ex­tended tim­ings, the In­dian mar­ket would be clos­ing for trad­ing one and a half hour be­fore the US mar­ket fin­ishes its busi­ness for the day. Many times in the past, the colour of the US mar­ket changed from

green to red or red to green in the last one and a half hour of trad­ing.

IN that case, what hap­pens to all the trade that is taken un­der the im­pres­sion that what is hap­pen­ing in the US mar­ket at night would be re­peated in the Asian and In­dian mar­kets next morn­ing? What if the trend in the US mar­ket is not re­peated in the In­dian mar­ket? It’s hap­pen­ing reg­u­larly these days. It would lead to a sit­u­a­tion where volatil­ity in the In­dian mar­ket would in­crease sharply when the mar­ket opens for trad­ing the next morn­ing. So, ex­ten­sion in tim­ing means spec­u­la­tive vol­umes and also an in­crease in volatil­ity. Why in­tro­duce an­other el­e­ment that might lead to greater volatil­ity in the mar­kets, es­pe­cially when it is known that lower volatil­ity is bet­ter for ev­ery stake­holder in the cap­i­tal mar­ket. Mar­kets which are less volatile tend to get higher val­u­a­tions. In fact, ex­change trade funds which fol­low the Nifty or Sen­sex as their bench­mark, this volatil­ity would hurt them a lot. Our pol­icy mak­ers should not for­get that a large part of do­mes­tic money, which is com­ing into mar­ket is com­ing to in­dex funds, and if the in­dex be­comes volatile, flow to these funds would come down, which in the long term will have a neg­a­tive im­pact not only on the In­dian cap­i­tal mar­ket, but also the econ­omy as well. The ar­gu­ment that In­dian in­vestors

In real life, traders would be tempted to take po­si­tions around the time when the US mar­ket is about to open and also around mid­night Why in­tro­duce an­other el­e­ment that might lead to greater volatil­ity in the mar­kets, es­pe­cially when it is known that lower volatil­ity is bet­ter

and traders would be in po­si­tion to re­act to any ma­jor global de­vel­op­ment when the US mar­kets open for trade is a flawed one. Yes, it would help for­eign in­vestors, who would be able to trade in In­dian in­dices as per their own con­ve­nience, in­stead of plac­ing overnight or­ders to their Hong Kong or lo­cal desks in In­dia. Also, it will prob­a­bly help some large bro­ker­ages, who in any case, keep a part of their of­fices open till mid­night for com­mod­ity traders. Surely, stock ex­changes will earn more money with the in­crease in vol­umes as their col­lec­tions from trans­ac­tion fee will in­crease. But, would it bring any­thing to the ta­ble for the in­vestors? The an­swer is no. Stock mar­kets are pri­mar­ily for in­vestors and not for traders.

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