Market favours continuing

• Current regular trading hours limited to two-and-a-half hours
• CSE Chairman intends to increase by further 30 minutes 
• Four-hour trading window to come back soon

By Shenal Fernando    The recent announcement by Colombo Stock Exchange (CSE) Chairman Dilshan Wirasekara that the CSE would not at present seek to extend its trading session duration to the previous four-hour trading session was readily accepted and largely considered as a positive decision by brokers and other stakeholders of the country’s equity market. The general consensus among industry players was that the restricted trading hours had not negatively impacted the market and that in fact, the market had performed better during the restricted trading hours due to a variety of reasons. Therefore, it was felt that there was no justification to return to the previous extended trading hours.   No four-hour trading sessions       Speaking to The Sunday Morning Business, Wirasekara stated that the prevailing one-hour daily power cuts, fuel supply issues under the quota system, and inadequate public sector transport facilities were preventing the CSE from effectively expanding its regular trading hours to four hours. He justified the recent decision by pointing to the fact that the country was still enduring at least one hour-long power cuts per day and that the implementation of the fuel quota was preventing people from utilising their personal vehicles, resulting in 30-40% of staff engaged in brokering activities working from home. Wirasekara noted that the CSE had extended trading hours by 30 minutes to two-and-a-half hours of regular trading last week, which was to be extended further to three hours of regular trading from 1 October onwards. “We extended it by 30 minutes recently, and we are hoping to extend it by another 30 minutes from 1 October onwards to see how that pans out. We will gradually revert to a four-hour trading window very soon,” Wirasekara stated. Currently, the pre-open session is held from 9.30 a.m. to 10 a.m. and the open auction is at 10 a.m. Regular trading commences at 10 a.m. after the open auction and stops at 12.30 p.m. Prior to the disruptions caused by Covid-19, the CSE was open for five hours per day for trading. However, trading hours were initially reduced to two hours (11 a.m. to 1 p.m.) when the market was reopened on 11 May 2020 after being closed for seven weeks from 16 March 2020 due to the curfew imposed following the escalation of the spread of Covid-19 in Sri Lanka, only opening for a curtailed trading period on 20 March. With the easing of Covid restrictions, the digitalisation of the CSE, and increased attention among retail investors, trading hours were gradually increased, and as of January 2022, the CSE, via a circular dated 22 December 2021, announced that it had decided to extend the trading hours of the market to four hours from three hours and 30 minutes. However, when the market started collapsing due to worsening energy disruptions around March 2022 amidst the collapse of the Sri Lankan economy, the CSE once again restricted trading hours to two hours (10.30 a.m. to 12.30 p.m.).     Arguments for restricted trading hours   Most equity markets in the world are open for five to seven hours a day for trading while smaller markets may be open for shorter periods. The current shorter trading session implemented by the CSE has proved to be effective over the past three years in pushing the market to all-time highs in terms of turnover, with the ASPI also reaching all-time highs. Therefore, a legitimate question arises as to whether a move to return to the former four to five-hour trading sessions could be detrimental to the market. A shorter trading session results in the compression of trading activities to a smaller period which translates to greater liquidity and smaller spreads and leads to a more efficient market. Shorter trading sessions also result in less volatility as the likelihood of material news being broken during the trading period is lower.  Speaking to The Sunday Morning Business, NP Capital Ltd. Chairman Nimal Perera stated that he was in favour of the continuation of the current restricted trading hours on the grounds that Sri Lanka’s equity market was a small market which lacked sufficient volumes to sustain trading over an exerted trading session. “We are currently observing a comparatively higher turnover than when the trading sessions’ durations were extended. If trading hours were extended, it will actually be disadvantageous for full-time traders as they will have to be glued to the screens for a longer period of time. This trading time period is also better for brokers as they can close shop and clear their back office early, enabling them to send the transaction details to their clients faster, instead of dragging things until late evening. This will allow them to focus on other things rather than just updating their records. Therefore, the current trading times are ideal and I don’t know who would want extended trading sessions right now,” Perera observed.              Speaking to The Sunday Morning Business, SC Securities Head of Research Charitha Gunasekara pointed out that the restriction of trading hours did not adversely impact market turnover and that turnover had actually increased instead. Therefore, he stated that he did not believe that extending the trading hours would lead to a material impact on market turnover, pointing out that what was observed in practice was that when trading hours were limited, the market activity level increased exponentially. Therefore, he opined that the current trading hours were more than sufficient. “When trading hours are limited, people become actively engaged in the market because they know the market will be closing in another two-and-a-half hours, expediting the whole trading process. Therefore, for the time being, I think the current trading period is more than sufficient. Earlier, when the market was open from 10.30 a.m. to 2.30 p.m., a daily turnover of around Rs. 1 billion was viewed as a very good turnover. Now we are recording an average daily turnover of around Rs. 3 billion during a two-and-a-half-hour trading session. Markets have become more efficient now,” he explained. Gunasekara further stated that the restricted trading hours had benefited all stakeholders and so far, had not created any negative impacts. He stated that brokers were able to finish back office accounting functions faster due to the current trading hours. NP Capital Ltd. Chairman Nimal Perera further pointed out that brokerage firms had been recording revenue at all-time high levels over the past three years despite the restricted trading sessions. Therefore, he stated that extending trading hours would not lead to a proportional increase in revenue for brokers and instead would lead to increased costs as a result of the extended working hours.   Arguments against restricted trading hours   Meanwhile, First Capital Holdings PLC Head of Research for Investments, Fixed Income, and Equity Dimantha Mathew stated that while the market was now mostly used to the current restricted trading hours, it could lead to situations where certain traders lacked sufficient time to study the market, which could harm volumes. “A trader employed full-time looking at the market online will only have a very narrow window to trade in. If I were to trade through my broker, I would have to call him within this narrow window of two-and-a-half hours. Sometimes it can be very difficult to get through to your broker. Therefore, there may be a lot of orders missed because of the limited hours,” he explained. He also pointed out that the current restricted trading hours were not favourable from a macro point of view because as a regulated money market, the CSE should be implementing international best practices and the current trading hours were behind the global average. According to Mathew, a longer trading session would decrease volatility in the market since all traders in a restricted market session would seek to enter their orders over a short span of time. He also pointed out that longer trading hours could lead to more effective price discovery. “When a share is going up it has more time to move up significantly. If a share is moving down, it has more time to move down significantly. Therefore, extending hours will also lead to increased turnover. It will also portray a better image of the market as it will comply with international best practices,” he shared.   According to NP Capital Ltd. Chairman Nimal Perera, the only justification to impose extended trading hours in the CSE was to facilitate the participation of foreign trading, considering the possible time differences. Elaborating further, he stated: “If we have investors from London and the US trading in the market, then of course extended trading hours are justified. However, right now with the current situation which includes power cuts and other disruptions, we shouldn’t pursue extended trading hours. Currently, local perception amounts to over 95% of the volumes in the market, so there is no justification to increase the trading hours. Once you have full foreign participation and the economy is fully operational without any restrictions, then we can extend trading to even seven hours.” He further stated that at present the market did not have the capacity to hold itself up if trading hours were extended to the previous time of 2.30 p.m.   SC Securities Head of Research Charitha Gunasekara pointed out that extended trading hours could lead to trader fatigue due to continuous focus on market movements for extended times. “When trading hours are extended, brokers will also be bogged down in front of a computer for four to five hours. Now they have more time to visit and address client concerns,” he explained.