Tuesday, December 13, 2011

Marketwatch: Why Did 24 Hour Trading Never Take Off?

I remember when the first discussions of 24 hour trading gained force in the late 90s thinking to myself "oh no.... won't they ever let us sleep? This is ridiculous."*  (then again the stock market was "fun" and "easy" then because we all could become millionaires trading NASDAQ stocks - why not have fun 24 hours a day!)

*that said, a lot of us now wake up all sorts of crazy hours in the middle of the night to check to see what greek irish portuguese spanish italian bond debt is doing!

Frankly with the way markets now work, I think we could have a 90 minute trading session because most days are dominated by gap ups or downs, and the rest of the session not much happens.  The only people benefiting are those who trade futures all night.  Marketwatch looks at why this (dumb) idea never took off.

  • Round-the-clock stock trading, once considered a natural and inevitable next step in an increasingly technology-driven, global market, is now widely seen by U.S. traders and exchanges as undesirable and unnecessary.  The reasons range from the practical — pallid investor demand that’s kept liquidity low — to the parochial. Stocks remain a local market for investors.
  • “The difference between stocks and commodities is that there are people all over the world wanting to buy wheat. [But] not everyone around the world wants to buy Chuck E. Cheese stock. At some level, it’s that simple,” said Ian Domowitz, managing director at Investment Technology Group, an independent agency research broker. 
  • And even for well-known issues, like Apple Inc.’s  stock, regulatory barriers make it tough for non-U.S. investors to buy stocks while America is asleep.  “Actually, turning on the trading engine is very easy to do, but then there is a lot of back-office arrangements that have to be made,” said Peter Clifford, deputy secretary general at the World Federation of Exchanges in Paris.
  • The idea of a 24-hour market started as an exciting realm of possibility in the 1990s, when stock exchanges enabled trading outside of the 9:30 a.m.-4:00 p.m. Eastern session, as part of efforts to fend off competition from other trading venues, such as electronic communication networks. But it never took off, even as multiple boom-and-bust cycles came and went in the following years.
  • Few dispute the advantages of continuous trading, like the ability to act immediately on news — such as Microsoft Corp.’s earnings, or China’s inflation data. For non-professional investors, the convenience of selling stock at 11 p.m., after finishing daily chores or putting the kids to bed, could be useful. The required physical infrastructure is also in place, thanks to the ability of electronic networks to connect buyers with sellers.
  • But if investors still can’t trade stocks as easily as they can bank at an ATM, it is largely because trading volumes remain thin outside regular hours, amplifying risks: Thinly traded markets are more volatile, and transactions there are costlier.  “It all revolves around liquidity — that’s the golden goose which provides efficient markets for investors,” said Bryan Harkins, chief operating officer at Direct Edge.  “Ultimately, exchanges are typically doing what brokers want … There is just not enough liquidity in the middle of the night and investors are not really demanding that. One way to look at it is, ‘Convenience is great, but I’d rather have a better price,’” he said.
  • Trading in foreign exchange and Treasurys takes place 24-hours a day for the most part of a week. Commodity and stock index futures also can be traded virtually around the clock every trading day. But trading hours in the world of individual stocks are much shorter.
  • Outside of the regular hours, NYSE Arca, the full-electronic exchange owned by NYSE Euronext, is currently open for business from 4 a.m. to 9:30 a.m., and then from 4 p.m. to 8 p.m., Eastern. Meanwhile, Nasdaq Stock Market, owned by Nasdaq OMX Group Inc., is open from 7 a.m. to 9:30 a.m. in pre-open and between 4 p.m. and 8 p.m. in the after-hours. Direct Edge currently opens at 8 a.m. in the pre-market and operates until 8 p.m. in the after-hours. Other exchanges and venues, such as Electronic Communication Networks, also offer trading beyond the regular hours for similar durations.
  • Still, stock trading in the U.S. continues to be concentrated during the regular session. Direct Edge’s Harkins said more than 95% of its volumes are transacted between 9:30 a.m. and 4 p.m. although the exchange is open on either side of that window. And while other trading venues have attempted to widen the trading hours, he added, “I would say their success is modest at best.”
  • Earlier this year, a Nasdaq spokesman told MarketWatch that about 2% of the volume on Nasdaq and NYSE was generated during off-hours.
  • The risks linked with low volumes have prompted U.S. regulators to place some restrictions during extended-hours trading. One example is that investors in the after-hours marketplace must submit limit orders — which can only execute at the investor stipulated order price, or better — and can’t present market orders, which execute at whatever the best price is at the time.
  • It’s not just the lack of demand that makes after-hours trading thin. The supply is also affected as several market-makers — firms that buy and sell stock for their own account or on behalf of clients — aren’t active during the extended hours.
  • Liquidity during off-hours could improve, at least in theory, if investors outside the U.S. were able to trade stocks here during their day. But that has its own difficulties.  For cross-border stock trading to become possible, issues outside a stock exchange’s control — such as where the shares will be delivered, or who the custodian will be — first need to be addressed, said Clifford, the World Federation of Exchanges official.  
  • But even if policy makers addressed those technicalities, he added, investors might still want to trade stocks in the most liquid market during their day — most likely their home market.  In other words, Hong Kong investors may not want to trade New York-listed stocks during the Asian day, any more than Americans would like to trade Hong Kong equities during the U.S. day.

Going to my point of why this idea was "super cool" in the late 90s, but not so much after the twin bear markets of the 00s:
  • “Everybody needs to take some rest,” said Peter Cardillo, chief market economist at Rockwell Global Capital, a boutique investment banking firm. “If you had a super bull market all the time, I think people would enjoy it, but if you have a super bear market, they wouldn’t.”

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