Is 24/7 Trading Better?
Since the founding of the New York Stock Exchange in 1792, trading hours have closely mirrored the conventional workday due to the human involvement that was essential for trading. But times have changed. Electronic execution has become typical for standardized financial products. Of the 13 equity exchanges in the U.S., the NYSE is the only one that is not 100 percent electronic.[1] What’s more, the majority of trades are now submitted by algorithmic traders. While only 15 percent of trades were the result of such submissions in 2003, up to 70-80 percent are today.
These trends, which suggest trading no longer depends on humans, have led market participants and policymakers to ask whether trades should occur 24/7. In April 2024, the NYSE polled market participants on the merits of 24/7 trading.[2] Further, 24X National Exchange LLC, backed by Steve Cohen’s Point72 Venture fund, has filed a second application[3]to the SEC for a registered national securities exchange under Section 6 of the Securities Exchange Act of 1934.[4] The exchange would trade 23 hours per day, seven days a week, and 365 days a year. The SEC has until the end of November to grant or deny 24X’s Form 1 application.
In a recent paper, we examine the costs and benefits of substantial modifications to trading hours, including the potential elimination of market closures.[5] Limiting trading times would, of course, constrain investment opportunities. If markets are closed and traders receive orders they need to execute, news they would like to respond to, or information about other risks they would like to hedge, they must maintain undesirable inventory positions for longer than they would like. Despite these costs, though, there are benefits to periodic market closures. In our model, we show these benefits can be substantial enough to outweigh the costs in some circumstances and are relevant in policy discussions of how long markets should be open.
What are the benefits of market closures? Traders who are concerned about price impact break orders into smaller pieces and execute those slowly to disguise them and minimize their price impact; the traders move slowly toward desired inventory positions. This fact is well established both in practice and academic theory.[6] [7] As a result, deviations from optimal inventory positions are particularly costly because they take time to adjust. Moreover, given that market closures exacerbate any deviations from optimal inventories, traders will have an incentive to enter market closures at inventory positions that are near optimal. Given that all traders who manage large inventories will have this incentive, any given one can expect the other traders to be aggressively adjusting their inventories in the lead up to the closure. This aggressive trading implies price impact will be minimal, creating an incentive for any given trader to trade even more aggressively. Liquidity begets liquidity as a market closure approaches.
This intuition is formalized in the model of our paper. In particular, we study allocative efficiency, which is an aggregate measure of traders’ ability to reach desirable inventory positions. We find that a periodic market closure of any duration is able to generate coordination and concentration of liquidity, with effects being stronger for longer closures. Surprisingly, this additional liquidity can be large enough to imply that a market structure with a periodic closure has greater allocative efficiency than one that is open 24/7. There is always a length of closure for which the allocative efficiency of a market with periodic market closures exceeds that of a market that is open 24/7.
Although the main point of our study is to highlight and quantify the benefits of a market closure, we also study the optimal length of a closure. Longer closures are costly because they restrict trade for longer periods of time. Yet, they are beneficial because they magnify the concentration and coordination of liquidity preceding the closure. The optimal tradeoff depends on parameters that describe the market. In larger markets, which are already fairly liquid because any demand pressure is dispersed across many traders, or markets in which intraday inventories are very volatile or holding costs are very high during periods of market closure, the benefits of concentrating liquidity through a lengthy closure are muted, and the costs are relatively large. Thus, in such settings, the optimal length of closure is relatively short. These results speak directly to recent policy proposals, particularly 24X’s proposal to the SEC to register a 23/7 exchange. In general, we estimate that, as long as there is a closure for some time, most of the benefits are accrued, implying that it is likely a 23/7 exchange would be beneficial over the current popular market design of 6.5/5.
Though the electronification of execution and submission of orders has diminished the need for market closures, we find that closures still play an important role by allowing traders to coordinate liquidity that otherwise would be spread thinly throughout time. It is worth caveating that our work focuses on the welfare of rational traders with information of similar quality. The interaction between these traders and retail traders, who are likely to have worse information and may not be rational, and how modifications in trading hours affect their interaction, remains largely unexplored. Along these lines, some research has suggested that gamification of the market through extended trading hours could result in worse outcomes for retail traders.[8] [9] We hope our study and future work will shed light on further costs and benefits of ever-changing modern financial markets.
ENDNOTES
[1]Brogaard, Jonathan and Ringgenberg, Matthew C. and Rosch, Dominik, Does Floor Trading Matter? 2024. Journal of Finance, Forthcoming, http://dx.doi.org/10.2139/ssrn.3609007
[2] https://www.ft.com/content/31c3a55b-9af9-4158-8a49-4397540571bf
[3]Their first application was withdrawn on February 16 , 2023 for technical reasons.
[4] https://www.sec.gov/files/rules/other/2024/34-100254.pdf
[5] Blonien, Patrick and Alexander Ober, 2024, Is 24/7 Trading Better?, Working Paper, https://ssrn.com/abstract=4942934
[6] Van Kervel, Vincent and Albert J. Menkveld, 2019, High-Frequency Trading around Large Institutional Orders, Journal of Finance, https://onlinelibrary.wiley.com/doi/full/10.1111/jofi.12759
[7] Vayanos, Dimitri, 1999, Strategic Trading and Welfare in a Dynamic Market, The Review of Economic Studies, https://academic.oup.com/restud/article/66/2/219/1563370
[8] DeHaan, Ed, and Andrew Glover, 2024, Market Access and Retail Investment Performance, The Accounting Review, Forthcoming and https://www.sec.gov/comments/10-242/10242-485711-1388594.pdf.
[9] Robinhood and Interactive Brokers effectively already allow for 24/5 trading for some stocks by internalizing orders from customers around the clock (https://www.ft.com/content/8b9ad19e-5b17-4b42-9e2a-4d11ddc12eb9).
This post comes to us from Patrick Blonien at Carnegie Mellon University’s David A. Tepper School of Business and Alexander Ober at Rice University’s Jesse H. Jones Graduate School of Business. It is based on their recent paper, “Is 24/7 Trading Better?” available here.