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By Dhirendra KumarSebi will allow stock exchanges to extend derivative trading hours to 11.55 pm from October.
At present, derivatives are traded till 3.30 pm.
This is good news for stock exchanges.
Longer trading hours will mean more trading.
Given that more than 90% of the trading volume is algorithmic trading of derivatives, it’s possible that the volume of trading will rise almost in proportion to the increase of hours.
That would be a windfall for the stock exchanges.
However, for individual investors, this is bad news.
The average Indian saver places all his or her money in deposits with banks or post offices or the government.
A small proportion invests in equity funds.
The starter investment is often a tax-saving fund.
As ELSS investments come with a lockin, and investors have to stay put for three years.
This is a reasonably long period to see good gains.
For most investors, the idea that equity funds can get you good returns becomes obvious.
A certain proportion of investors go beyond this stage—and generally with the help of what I would call equity investment’s equivalent of a drug dealer.
This person often goes by the name of a wealth manager or a relationship manager and is generally employed by a bank or a stockbroker.
His job is to get you hooked and take as much of your money as possible.
His logic is simple: why are you wasting your time As you already know that equity returns are good, he would like to introduce you to the form of equity that he says can get you the highest possible returns, which is ‘effendo’.
Effendo sounds like a magical spell but is actually the popular way to pronounce FO, or futures and options, or derivatives.
Effendo is like the Harry Potter spell called Evanesco, which makes things vanish.
Effendo can make money vanish, as it does for investors lured into derivatives trading.
I understand the official story about derivatives—they provide depth and breadth to the stock markets etc etc.
However, for a vast majority of small investors, this is rubbish.
Instead, in the words of Warren Buffett, they are financial weapons of mass destruction.
Derivatives can be used by traders to protect against risk, acting like an insurance policy.
However, they can also be used to enhance risk and returns, effectively as an instrument that offers a chance of higher gains, but also a high risk of huge losses.
The problem is not that using futures and options in this manner is possible, but that almost every part of the retail equities trading industry is dedicated to getting customers into this kind of trading.
Practically every broker does this and all the stock exchanges have spared no effort in getting as many people to trade as speculatively as possible.
Now, the exchanges have prevailed upon Sebi to allow a huge expansion of this activity.
This kind of institutional behaviour is disappointing, but not surprising.
Savers who understand this should save themselves from this kind of activity.
There will be many people who will try and tell you stories to earn fat commissions out of your money, but it’s your job to save yourself.
(The author is the Founder and CEO of Value Research)
