How is the extension of trading hours going to affect market participants? How should a system trader align with this change?

How is the extension of trading hours going to affect market participants? Will the backtested strategies work?

"The Only Constant in Life Is Change." - Heraclitus

Change is inevitable, yet the fear of it remains a constant in our lives. Recent reports reveal that The Association of National Exchange Members of India (ANMI) has given in-principle approval to extend trading hours for index futures, marking another shift in the landscape of Indian financial markets. While the extension applies solely to index derivatives, it prompts us to ponder its implications for traders and market participants alike.

To contextualize this prospective change, a journey through the annals of Indian stock market history is essential. From the nascent trading activity of the late 1980s to the advent of screen-based trading pioneered by the National Stock Exchange (NSE) in the mid-1990s, the market has undergone significant transformations. Each shift, whether in trading hours or technological innovation, has elicited reactions ranging from skepticism to outright opposition.

The evolution of trading hours serves as a poignant example of this dynamic. From the initial trading window of 12 PM to 2:30 PM in the 1980s, to the subsequent extensions in the 1990s and 2000s, the market has expanded its operational boundaries in response to changing demands and global trends. The transition from offline transactions to screen-based trading was met with resistance, yet it laid the foundation for increased market efficiency and accessibility.

When NSE launched its screen-based trading called NEAT, many protests were there; brokers claimed that many would lose jobs. But still, NSE went ahead with it. In 1997, trading hours were extended to 9:55 am-3:30 pm. A lot of opposition from brokers and traders occurred for the extension of timing. Many said they did not have the bandwidth, resources, and many protested to revert back to old timings. Nothing happened. Exchanges went ahead with new timing. In 1994, NSE's total turnover was just around Rs 6200 crore; after the change in market timing in the year 1997-98, its turnover jumped to Rs 9,08,691 crore. Again in 2009, timings were extended further. Instead of the market opening at 9:55 am, it was revised to 9 am where pre-open starts, and trading started from 9:15 am. Since then, we have been trading between 9:15 am to 3:30 pm.

However, the proposed extension of trading hours into the evening presents a unique set of challenges and opportunities. Active traders, accustomed to the current schedule, face the prospect of prolonged hours and heightened pressure. The strain on mental bandwidth and the risk of burnout loom large in this scenario, prompting introspection and adaptation among market participants.

Interestingly, Kirubakaran Rajendran, an Algo Trader, says, “This is one of the main reasons why I moved to rule-based trading in 2014 and completely moved to automated trading from 2017.”

He further explains, "Now there is a second set of traders who are more worried; they are system-based traders who started their trading journey recently with all kinds of backtests. They are already in a worried state because the introduction of every day expiry with different indices has already started killing their backtest results. Now with market timing extension, they are worried that their backtest won’t be relevant anymore. Such scenarios always happen. When you build a trading system like breakout/trend following or any kind of setups that are based on market microstructure, then there is no need to panic. I used to think all I have to do is create a trading system that gives outstanding backtest results and follow it with rigid discipline, but system-based trading is much more than that. It took me years to realize this."

Despite these concerns, the extension of trading hours holds potential benefits, including improved risk management and reduced overnight volatility. The ability to align trading activity with global market movements presents a strategic advantage for savvy investors and institutions.

In conclusion, as we stand on the precipice of yet another transformation in the Indian financial markets, one thing remains certain: change will come, whether we are prepared for it or not. The resilience of human adaptability has ensured our survival through millennia of upheaval and innovation. Those who embrace this change, rather than resist it, will not only survive but thrive in the dynamic landscape of modern finance.

Please share your opinion on the extended trading hours in the comment section.