24-hour stock trading: Exploring the future of round-the-clock equities markets
Key Takeaways
- Longer trading days aim to attract more investors to equities markets.
- Extended market hours would pose infrastructure, operations, and regulatory challenges.
- Should 24-hour stock market trading be adopted for equities, technology will play a key role in overcoming operational and other challenges.
Equities markets are beginning to grapple with the idea of 24-hour stock market trading. Established stock exchanges are resistant to the idea, despite the practice being well established in derivatives markets, and in new asset classes such as crypto. However, a range of new developments, including the upcoming launch of a round-the-clock equities exchange in the US, have raised the profile of the trading hours debate. What issues does 24-hour stock market trading raise for investors, brokers, and market participants?
Arguments in favor of longer hours
Currently, all major lit equities exchanges worldwide operate within a defined set of daytime market hours. This tradition began in the earliest days of the equities markets, and has proved resistant to change, despite the development of technology and global trading. Although many brokers today allow investors to place orders whenever they wish, market execution is restricted to trading hours. In theory, concentrating liquidity into a limited period of the day (including in scheduled auction phases) enables more effective price discovery. Buyers and sellers are more likely to intersect, and orders are matched more quickly.
Several factors have caused some market participants to suggest that trading hours should be extended. As algo trading continues to grow in popularity across all markets, fewer and fewer orders are directly dependent on human intervention. Given that traders can configure orders to operate independently (within set parameters), they do not necessarily need to supervise them outside standard office hours. Equities, as an asset class, operates in an increasingly competitive environment. Investors have a wide choice of options, including assets that trade 24 hours as standard. Restricted trading hours may discourage new active investors from participating in the equities markets.
Trading outside conventional hours in a single time zone may also make equities markets more attractive to investors around the world, opening new sources of liquidity. This is important for US markets, which are already a key target for investors around the world. Between 2016 and 2023, foreign investors holdings in US equities increased by 57%. Global retail investors seeking to take advantage of the consistent returns of the major US indices drove much of this growth. US markets already have the key selling points of efficiency, liquidity, and rich market data. US stock market extended market hours may further encourage global investment.
Criticisms
There are also strong arguments against trading across the full 24-hour day. Mid-2024, The Securities Industry and Financial Markets Association (SIFMA) outlined some of their key concerns in a letter to the SEC. These ranged from the effects on price transparency (since fewer orders are likely to be available overnight to allow for effective price discovery), through market structure (such as the impact on of start- and end-day auctions), to the costs for market participants.
SIFMA’s final point is crucial. Although algo orders can work independently to some extent, most brokers are unwilling to remove human oversight entirely. 24-hour trading would therefore require overnight traders, or staff in other time zones – both of which add financial and organizational overheads.
Using ‘offshore’ staff to handle orders in extended market hours also poses regulatory questions. If staff members in other jurisdictions manage US orders overnight, will they be required to be certified and registered in the same way as their US-based colleagues? Such traders will inevitably be more difficult for US regulators to sanction or prosecute. How regulators will respond to these challenges remains an open question.
True 24-hour trading also presents huge challenges for infrastructure and operations. Exchanges, vendors, and other providers rely on regular out-of-market hours periods to release updates and implement changes. While most plans for “24-hour” exchanges include at least some daily downtime, ensuring enough time for effective maintenance will challenge infrastructure providers across the industry. In addition, trading itself is only one part of a wider market environment, and extended market hours raise many other operational questions. Settlement deadlines, dividend entitlements, and the effect of corporate actions are all currently based around the traditional trading day. Market stakeholders will need to agree how these should be handled in a 24-hour trading environment.
Some stakeholders have gone beyond arguing in favor of the status quo; they have advocated for shorter trading hours. In doing so, they cite the potential for better work-life balance for market professionals. It’s also argued that unplanned interruptions to the trading day (due to technical issues, for example) do not affect overall traded volume, and that formally shortening market hours would therefore not have a negative effect. However, much like 24-hour trading, shorter market hours also raise concerns about price transparency. If more trading occurs out of market hours, with fewer orders available will this result in less effective discovery? Any change to the trading day runs the risk that liquidity is spread more thinly, and that order matching becomes more difficult.
Ultimately, the core question is: who is 24-hour trading for? After all, extending market hours does not in itself increase the total amount of liquidity available to the market.
In this regard, it’s interesting to draw a comparison with shorter settlement cycles, which theoretically allow capital to be freed up more quickly and therefore boost the available liquidity. Will longer trading hours really bring more capital into the equities markets? And if it does, will this liquidity be concentrated on a few in-demand, high-cap US stocks? For global markets, a potential concern is that US stock market extended hours will simply draw capital away from domestic stocks. It may also make instruments like American Depository Receipts (ADRs), which currently give access to US markets, less attractive to investors.
Conclusion
At this stage, it’s unclear whether major global equities markets will ever transition to 24-hour trading. There remain strong arguments in favor of existing market structures, and substantial hurdles in the way of longer trading hours. Nonetheless, whatever the future trading day looks like, it’s clear that technology will play a key role in enabling traders to adapt and thrive. Some of the operational challenges can be addressed through trading and back-office systems that support 24×5 trading, such as multi-hub solutions. As for the future of market structures, collaboration between exchanges, technology vendors, and other key stakeholders will be crucial.
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