Overnight Trading Gains Traction

A surge in retail investor activity from Asia Pacific has translated into higher demand for trading U.S. stocks during the overnight hours, according to U.S.-based off-exchange trading venue operator Blue Ocean Technologies LLC.

Overnight trading volumes on Blue Ocean ATS have picked up this year as it expands connectivity to brokers in Asia Pacific and strikes partnerships with order management systems and market data distribution platforms.

Meanwhile, Robinhood Markets said it plans to offer round-the-clock trading to users of the popular app in selected stocks and exchange traded funds, reported The Wall Street Journal. Starting in June, the online broker will route night-time orders to Blue Ocean, including those in popular stocks like Amazon and Tesla, during the same period when retail clients of major Asia Pacific brokers are active on the platform.

“Retail investors on the other side of the world want to trade U.S. equities during their day-time hours,” said Brian Hyndman, President and CEO of Blue Ocean ATS, in an interview. Blue Ocean ATS allows trading of US stocks during US overnight hours, filling the gap from 8:00 am to 4:00 pm ET, Sunday to Thursday, which corresponds to the most active period in Asia.

In March, Blue Ocean ATS volumes averaged 11 million shares a session, setting a record of 14 million shares in one session. This compared with average volumes of 900,000 shares in Q4 of 2022, 1.5 million in January, and 4.5 million in February. This growth comes after Blue Ocean’s average daily volume increased 230% from 2022 to 2023.

The rise in volume comes on the heels of Blue Ocean ATS signing several market data and connectivity agreements with broker-dealers in South Korea and Hong Kong.

In February, the ATS operator formed a connectivity and market data partnership with Futu Clearing, the U.S.-based clearing and execution subsidiary of Futu Holdings Limited, a fintech company providing a fully digitized experience. This gives Hong Kong investors the ability to electronically trade US National Market System (NMS) stocks and exchange traded funds (ETFs) during local business hours – 10:00 am to 6:00 pm in Hong Kong.

Hyndman said Futu gives Blue Ocean a beachhead into the Hong Kong market and that it’s working on entering in Japan’s market in Q2.

This also falls on the heels of BOT signing technology and market data partnerships to further expand its volume and liquidity.

In March, Intercontinental Exchange (ICE), announced that Blue Ocean Technologies’ real-time data feed for US equities trading during Asian business hours will be available on the ICE Consolidated Feed, reported Traders Magazine.

Last May, Blue Ocean formed a connectivity partnership with the FlexTrade ColorPalette sell-side order and execution management system (OEMS), broadening its reach to global broker dealers on the firm’s sell-side OMS platforms.

“Once we connected to the FlexTrade order management system, we are basically on their network and then we are connected to any of the 70-plus brokers that use the FlexTrade order management systems,” said Hyndman.

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The move toward 24 hour-trading has stimulated debate over the last two decades, but the industry has cited concerns about volatility, lower volumes, and wider bid-offer spreads.

When Hyndman worked for Nasdaq OMX Group and the subject of afterhours trading was broached in the early 2000s, major brokerage firms said their traders wanted to go home at 5 pm.

At the STANY Market Structure Conference in April, Hyndman said the “aha!” moment came when he spoke with brokerage firms in South Korea, Hong Kong, Singapore, and Japan, which all expressed interest in having the ability to trade US stocks during their day-time hours.

“Retail investors want to trade low-priced stocks, they want to trade the meme stocks they want to trade Nasdaq top 100, S&P 500 stocks, bank stocks, whatever is active – they want to trade it,” said Hyndman speaking on a panel.

From a risk standpoint, the ATS gives investors a platform to respond to events including late breaking news, corporate earnings releases, and other information such as merger announcements.

“If news breaks over the weekend, investors can start trading on Sunday night. We give investors the ability to manage their risk five nights a week,” said Hyndman.

One head trader that uses the ATS said that retail investors from Asia Pacific are eager to trade U.S. stocks, and that adding more participants on Blue Ocean ATS has pushed volumes higher and resulted in tighter spreads.

Handling Large Scale Flows

Stephen Bombardiere, Managing Director – Head of Equity Trading at Mirae Asset Securities (USA) Inc., said that volumes which were less than one million shares a day in 2022, are now regularly 10 million to 11 million shares a day. “It’s night and day!” said Bombardiere in April.

In 2022, Mirae Asset Securities (U.S.A) Inc., the US subsidiary of Korea-based Mirae Asset Financial Group, began using the Blue Ocean ATS. In 2021, Mirae selected FlexTrade’s ColorPalette order and execution management system (OEMS) because of its ability to handle the firm’s growing order flow and provide scalability. Now the firm can offer 24/6 real-time executions, allowing APAC clients to trade US names during their core market hours.

According to Chris Hempstead, Managing Director and Head of ETF and AP Portfolio Rebalance Trading at Mirae early volume on Blue Ocean was in ETFs, particularly leveraged ETFs. “A lot of the overnight trading is macro in nature, where ETFs are a heavy category for people looking for a macro-expression.”

Hempstead added that ETF trading is the better part of 30-35% of the notional trading day during regular trading hours, so it’s probably a higher percentage of overnight notional volume. “There will be higher activity in names like Tesla and Apple, and you will more likely see increased interest in ETF names in the overnight session,” he said.

Looking Ahead

At the STANY conference, Hyndman spoke on a panel about the new trading landscape, and where he sees overnight trading headed.

As an ATS, Blue Ocean performs many functions like an exchange. “We do everything that a traditional exchange would do. We provide lit market data, we execute based on price/time priority, we clear, we settle, we trade report,” said Hyndman on the STANY panel.

The ATS is no longer only trading ETFs such as the Dow 30 or Nasdaq 100 as it has now expanded into single stocks. With support from market makers like Virtu and Jane Street, it trades 2,000 NMS securities nightly.

One challenge that the new ATS has encountered revolves around corporate actions. When a company announces a two-for-one stock split, the ATS could start trading it at 8:00 pm. However, some brokers may not adjust their systems’ shares until later that night or the following day.

Hyndman said the industry is not there yet with corporate actions when the post-market trading session closes and Blue Ocean starts its overnight session. Currently, Blue Ocean communicates with its brokers and lets them know the stock is going to be halted. “When we are aware of a corporate action or a stock split, we hold the stock for the Blue Ocean session and pick it up the next night after the primary exchanges have traded it,” said Hyndman.

Looking forward, traders maintain that the rise of overnight trading is here to stay.

“It’s been a confluence of factors including the emergence of crypto and the retail investor cohort which has been a real force in persuading people to consider adopting (overnight trading) – something they previously thought they would never want to do,” said Mirae’s Bombardiere.

He added: “Now with electronic trading on your (mobile) phone, zero commissions and so much information available, the younger crowd and the retail crowd are here to stay and they’re a force that brokers cannot ignore.”

The news of Robinhood offering overnight trading to its retail customers is a sign that some financial services firms are pushing to extend the trading day beyond the traditional east coast hours. Other U.S. brokers that offer overnight trading use Blue Ocean as well, reported the WSJ.

If volume continues to increase, the ATS has the potential to attract order flow from institutional brokers and asset managers in the U.S.

Bombardiere said: “Once critical mass for overnight trading is reached, it will not be unusual for a hedge fund to get an idea at 2 a.m., then look at Blue Ocean for proper volume and spread in a name it cares about, and then simply execute the trade.”

To further increase its volumes, Hyndman told Markets Media that he is considering extending the trading day to 17.5 hours. Currently exchanges offer pre-market trading from 8:00 am to 9:30 a.m. when U.S. exchanges are open. After- hours trading usually takes place from 4:00 pm until 8:00 pm. So far, incumbent exchanges have not shown interest in the overnight space.

It remains to be seen whether overnight trading evolves into 24-hour trading in US stocks. Other changes will be necessary to make this happen.

Extending Blue Ocean’s trading hours would entail real-time reporting and changes to clearing and settlement processes. Currently, Blue Ocean reports its trades to the NYSE Trade Reporting Facility (TRF) no later than 8:15 a.m. the following morning. Blue Ocean is not open for trading on Friday or Saturday evenings, because the TRF is not open for reporting the following day.

On the clearance side, Blue Ocean sends trades in batch style to its clearing partner, which sends them over to the NSCC, the central clearing counterparty. “We’d love to work with the industry and NSCC to see how we could get that over time to a real-time clearing solution,” said Hyndman.

“NSCC is not open until the next day. Before we get to 24/7, we need to get 24/5 right,” he explained.

“If we can get SIFMA and other industry participants behind pushing the central clearing party to be more real time, I think that’s going to pave the way for 24/by 5 which then turn into 24/ by 7,” said Hyndman.