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Blowout Over Trading Hours

India’s premier stock exchanges indulged in a childish tiff over increasing the number of hours they remain open for business, putting under question their intent on maximizing shareholders’ value

Last week, the managements of India’s two stock exchanges contrived to get a lot of egg on their faces in a matter that really should have been handled quite smoothly. I’m referring, of course, to the drama of exchanges extending their trading hours, getting into a kindergarten-type me-too fight over it and then rolling it back when reprimanded by the headmaster. First, the Bombay Stock Exchange (BSE) brought forward the start of its day by 7 minutes, then the National Stock Exchange (NSE) mounted a strong reply by doing the same by 55 minutes and then, apparently, within minutes, the BSE also matched it. Next morning, when the competitive rush subsided and the adrenaline stopped coursing through the veins of the people in both the stock exchanges, the timing was rolled back to the original 9.55 a.m., at least for the time being.

Whatever happens about the timing issue, eventually, this episode has raised some interesting questions about the fundamental nature of the stock exchanges. As things have evolved, they are normal for-profit corporations. The NSE was structured like that since its beginning and the BSE became so in 2007. The two exchanges (and more that will come into being) are competing for customers, for business and for profits. Their business is to facilitate trading and each exchange makes more money both by expanding trading as an activity and by getting traders to prefer it rather than the other. The two exchanges have various stakeholders including the Singapore and New York stock exchanges, as well as Goldman Sachs.

The motive behind the competitive time-table modifications was to capture more of the trading market, ostensibly business originating from abroad. However, this episode has led to a lot of people questioning how much the exchanges’ managements are interested in balancing their dual role of maximising their shareholders’ value and that of acting as responsible institutions that occupy a pivotal role in the economy. At the bottom of the whole pyramid of Indian equity markets lies the individual who is investing and trading, and I’m afraid that the trade-maximising structure of the equity markets rages the strongest at that end.

The culture of stock investing in India is exclusively about ultra short-term trading, and increasingly in derivatives which, even in their most basic form, are only hazily understood by those who are trading in them. We have the highest volume of derivative trades in the world, larger than markets that are much bigger in value. Our entire eco-system of stock broking and advice has evolved into one that is positively hostile to anything but short-term punting. Now, I know all the arguments about liquidity-creation and the value-discovering role of short-horizon trading. However, all that liquidity and value generated by trading can’t just be in aid of yet more trading. I’m not really sure where all this is leading.