Summary:
The financial market is undergoing significant transformations with the advent of 24-hour trading, AI integration, and tokenization. Major exchanges like Nasdaq, the New York Stock Exchange, Cboe, and the London Stock Exchange are extending equity trading hours to operate around the clock. This shift aims to enhance liquidity and accessibility but raises questions about market quality and investor protection during extended trading periods.
What This Means for You:
- Increased Accessibility: With 24-hour trading, you can execute trades at any time, catering to global markets and different time zones.
- Higher Volatility and Risk: Extended hours trading often sees lower liquidity, leading to wider spreads and potentially higher trading costs.
- Investor Protection Concerns: Without NBBO (National Best Bid and Offer) and OPR (Order Protection Rule), there’s a higher risk of trade-throughs and unfavorable executions.
- Future Outlook: While 24-hour trading offers convenience, ensuring robust investor protections and competitive lit quotes remains critical for market integrity.
Original Post:
There are a lot of big changes that might shape how stocks trade in the future — from 24-hour trading to AI and tokenization. Over the past year, major exchanges, including Nasdaq, the New York Stock Exchange, Cboe (in the U.S.), and the London Stock Exchange, have all announced plans to extend equity trading hours toward 24 hours a day. Clearing and settlement (DTCC) and the Consolidated Tape (SIP) will also need to be upgraded.
Today we’re going to look at what research says about how overnight trading works now. The data points might help us work out how 24-hour trading should work.
Not a lot of data on extended-hours trading
One problem with understanding how extended-hours trading works is there is not a lot of data on it. Extended-hours trading accounts for about 11% of total daily volume, with overnight trading (8 p.m. to 4 a.m.) accounting for only 0.2% of the total equity market volume.
Why do we care about extended-hours trading?
Importantly, the rules of trading are also different. There is no NBBO and no OPR (order protection rule), which means trade-throughs are allowed, and there is no 605 reporting to account for how much trade-throughs cost investors. Market volatility trading bands (like LULD and Market-Wide Circuit Breakers) are also not available to protect investors.
Looking at the research that has been done
Recently, a number of research papers have been done by academics, looking at overnight and extended-hours trading. Academics consistently suggest that overnight trading is primarily used by retail investors, and they pay much higher trading costs overnight.
Some studies suggest shorter hours might improve market quality
Not all studies suggest longer hours are better. Another study looked at European trading and suggested that their longer trading day might actually be harming market quality and adding to execution costs.
Expert Opinion:
The shift towards 24-hour trading underscores the need for robust investor protections and competitive lit quotes to maintain market integrity. As trading practices evolve, ensuring fair execution and transparency will be paramount.
Extra Information:
Nasdaq’s insights on 24-hour trading provides a deeper dive into the implications of extended trading hours. Additionally, DTCC’s plans for 24-hour clearing highlight the infrastructural changes required for seamless operations.
People Also Ask About:
- What is 24-hour trading? A trading model allowing markets to operate continuously, catering to global investors across different time zones.
- How does extended-hours trading affect liquidity? It often results in lower liquidity, leading to wider spreads and higher trading costs.
- Are there risks in overnight trading? Yes, risks include higher volatility, trade-throughs, and lack of investor protections like NBBO and OPR.
- How do exchanges handle 24-hour trading? Exchanges are upgrading clearing, settlement, and consolidated tape systems to support extended trading.
Key Terms:
- 24-hour trading
- Extended-hours trading
- Investor protection
- Market volatility
- NBBO (National Best Bid and Offer)
- OPR (Order Protection Rule)
- Tokenization in financial markets
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