Sucheta Dalal :Is SGX Nifty trading relevant for India?
Sucheta Dalal

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Is SGX Nifty trading relevant for India?  

January 12, 2010

Following the National Stock Exchange's (NSE) extension of trading hours, the Singapore Stock Exchange (SGX) has also extended the trade timings of its Nifty futures segment, the SGX CNX Nifty. Nifty futures on the SGX will be traded for 16 hours on that exchange while the Nifty now trades for six-and-half hours on the NSE. While concerns are being raised as to whether this move would snatch away the volumes of the NSE, it is not a cause for worry because there is essentially no correlation between the NSE Nifty and SGX Nifty. The dynamics of the two markets are completely different.

There are a couple of reasons for this. One, the market timings are such that NSE Nifty trading remains closed while the SGX Nifty futures are traded. As such, although the SGX Nifty opens before the NSE Nifty starts trading, it does not get the benefit of higher volumes. This is because any movement in the SGX Nifty is based on the market direction of the Nifty, which itself is a function of the news doing the rounds on that particular day. If the NSE Nifty is not trading, what would be the basis of price movement in the SGX Nifty? Only in the case of a major global event would foreign investors stand to benefit from the difference in trade timings. As attentive traders know, the SGX Nifty virtually does not trade before the Indian market opens.

Second, the volatility in the SGX Nifty volumes is quite high compared to that of the NSE Nifty, and it depends on factors that have nothing to do with the Indian market. Such volatility is not the mainstay of the NSE Nifty or the Indian stock markets, for that matter. On 4th January 2010, the total number of SGX Nifty contracts traded was 9,712, which increased more than tenfold on 5th January 2010 to 50,546. On the other hand, the total number of traded contracts in NSE Nifty Futures on 4th January was 237,231, which increased to 339,132 on 5th January, a much smaller change of 43%. Moreover, such volatility is noticed in the NSE Nifty only in case of any major domestic or international event.

The major reason cited by the NSE for extending trading hours was that the SGX Nifty was eating away at its volumes, and that this move would help it win back some of the volumes. However, it seems that the strategy has not proven effective for NSE, if the volumes are anything to go by. When the NSE opened early from 4 January 2010, the NSE Nifty futures volumes fell sharply instead of going up.

The Singapore Nifty was a sleepy futures product right until 2007. In October 2007, the daily average number of traded contracts was 22,645, but it increased by a whopping 1,102% to 2,72,291 contracts in November 2007, following the ban on participatory notes by the Indian government. However, the volumes shrank dramatically from October 2008 and have not gained momentum since then. The SGX Nifty futures average traded volumes in CY2009 fell by 46% compared to CY2008. Compared to this, the Nifty futures traded contracts have fallen by only 16% in CY2009. During this period, the Nifty has risen by 80% but this has not made any difference to the SGX Nifty volumes.

Clearly, this adverse movement in the SGX Nifty volumes in the last two years has no correlation with the NSE Nifty. The SGX Nifty appears to be influenced by a completely different set of dynamics.

Sanket Dhanorkar with Ravi Samalad

-- Sucheta Dalal