There’s an old adage describing the realities of war that increasingly applies to the stock market experience – long stretches of boredom punctuated by moments of terror.
Trading volumes on major exchanges have shifted heavily to the market close in recent years, compressing a day’s worth of pent-up volatility into a brief, delirious home stretch.
In fact, roughly one-third of all trades in S&P 500 index stocks now occur within the final 10 minutes of the trading day, according to data compiled by BestEx Research, a U.S.-based algorithmic trading firm.
This isn’t ideal, for a variety of reasons. Some recent studies have found that such heavy concentration of trading can distort stock prices. Trading volumes through the quieter hours of the day may also suffer.
Perhaps the problem lies with the concept of the trading day itself. The preclose frenzy might go away pretty quickly if the market never closed. It’s not such a crazy idea. After all, having the world’s financial markets revolve around a literal bell that rings twice daily seems a touch outdated.
Other big markets are aligned with the current century. Treasuries, currencies, some stock index futures, and crypto assets all have some form of round-the-clock trading.
And yet the stock market is largely stuck in an era when floor traders hollered into land lines until precisely 4 p.m. But a push to modernize stock trading is gaining traction.
The New York Stock Exchange is currently surveying market participants on their thoughts about implementing 24/7 trading.
There is clearly demand. Some discount brokers like Robinhood already offer a version of overnight trading facilitated by private exchanges called “dark pools.”
Robinhood recently said that up to 25 per cent of trading activity on its platform takes place outside standard market hours. And the program hasn’t even been in place for a year yet.
Meanwhile, fintech companies like Blue Ocean Technologies have given investors in Asia the opportunity to trade U.S. stocks on their own time, free from the yoke of the New York trading day.
For the NYSE to head in this direction, however, would be a much different beast than the patchwork of current offerings. Such a move by the world’s largest exchange would legitimize overnight trading, with direct oversight by the Securities and Exchange Commission.
Giving investors the opportunity to manage risk or react to late news would improve access and arguably make the financial markets more efficient.
It may also help with the clustering of market noise around the opening and closing bells.
A new study by German researchers examined trading on a number of European exchanges, which have also seen great volumes of stock trading pushed to the end of the day.
The study found that intense late trading in European large-cap stocks resulted in price distortions that were partly reversed overnight and in initial trading after the opening bell. The academics note that the phenomenon is driven in part by the growth of passive index funds, which tend to be very active toward the end of the trading day, as their target benchmarks are typically evaluated on closing prices.
In a world of continuous trading, those funds would still need some sort of cutoff to rebalance for the day, said Tom Caldwell, chief executive officer of Toronto-based Urbana Corp. URB-T, the largest individual shareholder in Blue Ocean. That means there would still be a spike in trading volumes at that point.
“There will still have to be a closing point, if not literally, then figuratively,” Mr. Caldwell said.
The sheer logistics of 24/7 trading are indeed daunting. The whole stock market ecosystem is built around a 6½-hour trading day, which has its advantages. It maximizes the number of buyers and sellers participating at the same time, which is key to a healthy trading environment.
Trading volumes are bound to be much lower in the middle of the night, meaning there could be bursts of volatility when fewer traders and market makers are paying attention.
Firms will also need to figure out how to staff overnight sessions. And financial professionals will face the risk of never being off the clock. It’s not hard to understand why there is considerable industry resistance to doing away with the trading day.
Fortunately, there is a precedent for the stock market to follow. With bitcoin increasingly becoming mainstream, the institutions of finance have figured out how to navigate and capitalize on one global market that never sleeps.
It’s hard to imagine the industry holding off the forces of round-the-clock stock trading forever.
Eventually, the pull of technology and globalization will win the day, and the market bell can be retired. Maybe put it in a museum somewhere, where future generations of investors can marvel at how quaint the markets once were.
Tim Shufelt