Will Overnight Trading Evolve into a 24-Hour Stock Market?
By Ivy Schmerken
With the surge in retail trading and meme stocks over the past 18 months, some industry observers say that demand for overnight trading in U.S. stocks has picked up and that the dream of 24-hour trading in U.S. equities is not far off.
Despite past attempts to usher in 24-hour trading in U.S. equities, a major catalyst behind the current momentum has been the round-the-clock trading occurring in cryptocurrencies, say several market participants. Many market observers believe that investors should have the ability to buy and sell stocks around the clock just as they do in bitcoin and cryptocurrencies.
On Oct. 5, Blue Ocean ATS launched the first regulated dark pool for overnight trading in response to the demand for U.S. stocks from retail investors in Asia-Pacific. The startup ATS has partnered with leading broker-dealers that serve institutions and cater to retail investors, according to the company.
“It’s designed to give Asian investors the ability to trade U.S. stocks during their day-time hours. But it really gives any investor the ability to manage their risk 24 hours a day,” said Brian Hyndman, President and Chief Operating Officer of Blue Ocean Technologies, in an interview.
After speaking to many brokerage firms in Asia, Hyndman learned that investors want to trade U.S. stocks during their day-time hours. “If there’s volume and opportunity to either trade or manage risk that Asian investors want to be involved in it. They want trade the Teslas of the world; and they want to trade the Microsofts of this world.”
Currently, investors have access to pre-market trading sessions at the Nasdaq and other major exchanges including Cboe and NYSE Arca from 4:00 am to 9:30 am. The standard Wall Street session runs from 9:30 am to 4:30 pm, and the post-market session is available from 4:00 pm to 8:00pm EST. “Blue Ocean is filling the void from 8:00 pm to 4:00 am ET,” when markets are not open, said Hyndman.
When news breaks overnight or on the weekend, this gives investors the ability to enter a position or exit a position to adjust their risk. “Let’s say on a Sunday night, there is some type of geopolitical event or oil is rising or falling in price. You can go and trade an oil ETF on our platform. You don’t have to wait until the next morning,” said Hyndman. Right now, investors need to put in a limit order and hope it gets executed overnight in their time zone or go buy mutual funds, he said.
Hyndman, who is a veteran of capital markets, was an executive at Nasdaq Transaction Services in the mid-2000s when the exchange explored going to 24-hour trading and recalled that brokerage customers were not ready for it back then. “But the world has changed very quickly,” said Hyndman who observed demand building for overnight trading in U.S. equities over the past 12-to-18 months. “Most firms have the infrastructure now to support 24-hour trading either here in the U.S. or they have offices in Singapore or Hong Kong to trade on a 24-hour basis,” he said.
While focused on the overnight period when U.S. exchanges are closed, Hyndman believes there is demand for 24-hour trading in U.S. equities. “We really see US equities going 24 hours a day five days a week,” he said, noting that the futures exchanges already trade 23 hours a day and the crypto market trades 24-hours a day.
Crypto is the Driver
Pointing to the fact that crypto venues offer 24-hour trading, some industry sources insist this is inevitable for U.S. stocks traded on exchanges and other venues.
“If there is liquidity enough for 24/7/365 days a year trading in crypto then there certainly is for stocks. Pre-and after market already runs from 4:00 am to past 8:00 pm,” said Clem Chambers, CEO of website Investors.Hub.com, an independently operated US-based subsidiary of ADVFN PLC, which provides real-time information on stocks, shares, and crypto.
“If you look at the pre-and after-markets that is often where the action is,” said Chambers, who in an interview, said the firm’s web site shows activity occurring at the 4:00 a.m. session, when it’s midnight in the U.K. “There’s the pre-market and after that, the post-market. When the market closes and company results are announced, that’s when stocks move,” he said. Take the example of Elon Musk who conducted a Twitter poll over the weekend asking his 62.5 million followers if he should sell 10% of his Tesla stock.
Chambers argues that exchanges will need to offer 24/7/365 trading, otherwise they will lose market share to crypto venues, adding that Gen Z and millennials are the customers, and they want this to happen, noting that it’s about customer convenience.
24 Exchange Pushes the Envelope
Dmitri Galinov, a serial entrepreneur with a background in electronic trading, is keen to transform U.S. equities into a 24-hour multi-asset market.
Galinov, founder and CEO of 24 Exchange, is seeking approval from the Securities and Exchange Commission to launch the first U.S. stock exchange that operates around the clock, including weekends and holidays, reported the Wall Street Journal on Oct. 5.
The three-year old startup trades FX and crypto today, and the plan is to add stocks next, said Galinov. Its parent company, 24 Exchange Bermuda Ltd., is incorporated in Bermuda, but the U.S. stock exchange would be run by a U.S. subsidiary, reported the WSJ.
Galinov worked at Credit Suisse during the 2000s where he ran the bank’s CrossFinder ATS for equities. He developed FastMatch for FX trading which was sold to Euronext NV. According to the WSJ, investors in 24 Exchange include Standard Charter Bank, which Galinov said is a registered U.S. swaps dealer and provides regulated clearing services for FX derivatives on the platform.
In an interview, Galinov said he has been thinking about 24/7 trading for a long time. “The idea was to create an electronic platform to exchange various asset classes at the lowest possible cost, 24/7. Once you have a 24/7 system, you create a multi-asset class system, it’s much more efficient and operational,” said Galinov.
“Right now, there is a hodgepodge of trading venues for different asset classes,” he said, describing this as “pretty messy.” “If it’s one electronic system, working 24 /7 instantaneously it will give you the asset and the best price,” he said. “You can have Microsoft and bitcoin, Microsoft in yen, Microsoft in Indian rupee,” he said.
Such a move could lead to massive job creation on Wall Street in operations for equities, an area that has been heavily cut by Wall Street, he said. Jobs will be created to service the customer 24/7, just as banks hired for their FX businesses. “If the platform is a single system, it’s going to create more jobs, because the system will operate longer in multiple asset classes,” he said. Instead of having 1400 hours a year to generate revenue, Wall Street will have 8600 hours a year to make money, he said.
Assessing the Risks
However, other market expert questions whether there is enough liquidity to support 24-hour trading and point to the volatility and wider spreads that occur during the early morning and afterhours trading sessions operated by major exchanges. “This is one of those classic scenarios where theory and practice are very different,” said Joe Wald, Managing Director, Co-head of Electronic Trading at BMO Capital Markets/Clearpool Group.
Wald maintains that trading volume is extremely light on the premarket and afterhours trading sessions. “They only tend to have real liquidity when there is earnings or news in a stock,” said Wald. In addition, there is no quote protection under Regulation NMS during those sessions, requiring brokers to get the best available price in the market. He also cites wide spreads and risks from corporate actions, including ex-dividends, reorgs, and stocks splits, which can cause dislocations in price. “That can be incredibly dangerous for an unsophisticated investor,” warned Wald, who also noted that professional traders, market makers, and earnings-based institutional investors are the main groups trading during the pre-and-after market sessions.
But Galinov argues there is enough demand for U.S. stock trading from international investors outside the U.S. especially in time zones more than 12 hours ahead. For example, the National Stock Exchange (NSE) of India introduced trading of select U.S. stocks recently, and the Moscow Exchange launched trading of international shares with settlement in US dollars.
Galinov maintains that volatility will attract market makers and other participants to 24-hour trading, and over time, price swings will stabilize. “That’s why bitcoin and all those other cryptocurrencies are popular,” he said. “It’s better to have a volatile price, than no price,” he said.
The main reason there is volatility is that companies announce news after the market closes, or something happens over the weekend, so there are gaps. One of the benefits of 24- hour trading will be opportunities to trade the stock over the weekend. “There is excitement, people want to do it, and I think retail investors will like it,” he said.
While in theory Wald said there should be no barriers to expressing trading interest, there is a lot to unpack before the industry goes to 24/7 trading, and part of that is shortening the settlement period for stocks. While the industry has been talking about shrinking the settlement period from T+2 to T+1, and T+0 in the future, Wald said as a practical matter, “when would transactions settle if they are done on a Saturday or Sunday?”
Currently, trades that occur overnight on Blue Ocean ATS from 8:00 p.m. to 12:00 a.m., said Hyndman. ET are considered next day trades and are sent to NSCC (National Securities Clearing Corp.) for clearing the next morning. “If someone executes at 10:00 pm at night, it’s going to be sent to NSCC the next day and into the NYSE Trade Reporting Facility (TRF) at 8:00 am the next morning,” said Hyndman.
Hyndman is in favor of shortening the settlement cycle.
“Any technology that allows you to shorten the settlement cycle is a good move.” He noted, “there are platforms looking to compete with the NSCCs of the world and use advanced technology to reduce that settlement time from two days down to one day or even minutes. I view that to be a positive for the industry.”
Galinov said that 24-hour trading with T+0 settlement in US equities is absolutely possible citing Paxos as a regulated market infrastructure platform which provides settlement services through blockchain and has a trust license. He noted that the FX market has near real-time settlement within minutes of the trade, and that clearing houses such as LCH and CME can lock in a trade quickly. Though the big banks and broker-dealers are not ready for T +0 for operational reasons, Galinov predicted that T+0 in U.S. equities is about two or three years away.
Impact of Overnight Volumes
If trading in U.S. stocks were to go 24/7, sell-side trading systems would need to expand their hours of operation. The heightened activity in retail trading, especially from Asia Pacific, already has been reflected in the traffic flowing through order management systems (OMSs).
“We’ve definitely seen more interest in being able to handle large numbers of retail orders coming from APAC during the U.S. overnight, said Shane Remolina, Director of Business Development for Sell-Side Trading Technology at FlexTrade Systems. “In general, considerable increases can be seen in order flows during the overnight window, and the corresponding volume uptick during early morning starting with the premarket open at 4:00 a.m. ET,” he said. Remolina estimates that those volumes are multiples of what they were three to four years ago, climaxing during the meme stock episode in early 2020.
Previously, FlexTrade Systems had taken steps to expand capacity and throughput on its OMSs. Currently, FlexTrade’s turnkey OMS solution runs 23.5 hours, 6 days a week, said Remolina, with the enterprise-grade platform having the ability to run at 24 hours continuously throughout the week. To expand capacity further, FlexTrade augmented its infrastructure and designed “order hospital functionality,” allowing clients to focus on exceptions and orders that need more attention rather than filling the blotter with hundreds of thousands of orders. “Infrastructure upgrades, order hospital design, and decreasing the turnaround time for the daily database instance to 30 minutes, allowed the system to effectively run 23.5 hours, six days a week,” he said, adding, “This enables both large and small firms alike to run overnight and handle these increased flows.”
It remains to be seen if 24-hour trading will evolve on mainstream markets, but online brokers like Charles Schwab are allowing their retail clients to trade during the extended premarket and afterhours sessions. Trades occur through a leading electronic communications network or electronic exchange, according to the firm’s web site.
“Ultimately the stock market is going to compete with the crypto market,” said InvestorsHub.com’s Clem Chambers. “An unaccountable number of exchanges are run out of people’s bedrooms,” he said. “If they can provide 365 hours-a day-service, why can’t the NYSE or Nasdaq do it,” he exclaimed.
No doubt, the major venues, broker-dealers, and banks will have a voice in whether 24-hour equities trading happens. Wald said there is no question that the industry should have 24-hour trading, but he advocates for doing it in a thoughtful manner. Beyond offering the extended trading sessions, Wald said, “Our next step is ATSs trading in the afterhours as well.”
Though U.S. brokers were not ready a couple of years ago, a global 24-hour trading mindset is evolving said Hyndman. “We are giving access to Asian investors who are reaching out to their U.S. brokers and asking how to get connected. It’s all kind of happening in real time,” said Hyndman.
Meanwhile, retail investors eyeing the tweets of Elon Musk over a recent weekend could become impatient to trade on the weekend. “People can always wait until Monday when the NYSE or Nasdaq opens to trade, but if the stock went up over the weekend, and people want to take profits or reduce risk, why do you want to wait until Monday?” said Galinov.