The market that never sleeps is coming, and it could be a boon for foreign investors, but the jury is still out on how U.S. retail investors will fare.
Long the domain of cryptocurrencies and brokerage firms like Robinhood Markets, Interactive Brokers, Firstrade, and Charles Schwab, near-round-the-clock trading is now coming to national securities exchanges starting Dec. 6.
Nasdaq reaffirmed this week its plans to launch a new overnight trading session from 9 p.m. to 4 a.m. Eastern time starting Sunday, Dec. 6, moving it to a 23-hour-a-day, five-day-a-week trading schedule. The New York Stock Exchange also plans to begin 23-hour trading on the same date.
The exchanges’ new trading sessions remain subject to securities information processor, or SIP, “readiness” as well as applicable Securities and Exchange Commission rule changes.
Exchanges—including Nasdaq, the New York Stock Exchange, and 24X National Exchange—are targeting Dec. 6 because that’s when the SIPs have said they will be ready to facilitate the new trading hours. The exchanges are confident they will be able to offer the new trading session on that date.
The SEC declined to comment to Barron’s on the current approval status. The SEC also didn’t respond to request for comment regarding claims that it isn’t doing enough to protect investors when 23-hour trading arrives.
The shift to 23-hour trading five days a week could be good for business for Nasdaq and NYSE, with both exchanges telling Barron’s the new overnight session is geared largely toward the international investing crowd, particularly in Asia.
“From a business opportunity, absolutely,” Jon Herrick, chief product officer at NYSE, says. “Commercially, that’s a very big driver here.”
Chuck Mack, Nasdaq’s senior vice president, head of strategic operations and public policy, says the broad demand for access to the U.S. market is something all investors should be excited about.
“We want to give access to the markets to investors during their daylight hours, and that’s really what this is about,” Mack says.
But for the U.S.-based retail investor, it could be a gamble, with expectations of low liquidity in the new trading session and the possibility of volatile price action.
The new trading session will also mean that U.S. investors could face market-moving news and price swings outside of traditional trading hours, potentially forcing them to decide whether to react during extended hours.
“The little guy is going is going to be a goose whose feathers are waiting to be plucked,” says James Cox, the Brainerd Currie professor of law at Duke University School of Law, who specializes in corporate and securities law.
In a tale as old as time, retail investors could find themselves at a disadvantage while large hedge funds and investment banks seize on the opportunity to capitalize.
“I think there’s going to be a learning curve, and that curve is going to be fairly short for the investment banks to exploit the less deep market through arbitrage activities,” Cox says.
“If they see there’s going to be noticeable price disparities, they’re going to work to capture them,” Cox adds.
He says that the increased risk in the overnight session might also stimulate derivatives markets as a way to balance risk.
The exchanges and SEC have tried mitigate the potential for drastic price changes in the overnight session with market-wide volatility bands.
Those bands will effectively, based on a reference price, restrict moves that are greater than 20%, according to NYSE.
“It’s a similar, more robust form of investor protection that’s being extended to those hours, and I think there is a vested interest from many to continue to potentially tweak that to the benefit of investor protection,” Herrick says.
There will also be a one-hour pause from 8 p.m. to 9 p.m. each day, which the exchanges say is also a safety guardrail as well as an opportunity to make sure everything is functioning properly.
Still, there are doubts that enough is being done to protect investors from potentially wild price moves in markets with thinner liquidity than is found in the core U.S. market hours.
Benjamin Schiffrin, director of securities policy for advocacy organization Better Markets, says that investors need to understand the prices they’re going to get during overnight sessions are not necessarily the same prices they could get during normal trading hours.
U.S. investors will have to balance this risk with the opportunities that the shift to 23-hour trading brings, including the potential for more investors to join the market and more regulated round-the-clock trading compared with what currently occurs.
“The national securities exchanges that are very transparent and have transparent rulebooks—we heavily incentivize display liquidity. You’re going to have more robust liquidity than you have now, and that’s a big reason why we want to get involved—to make the market better,” Mack says.
All of this, though, is broadly an audition for what could come next: 24-hour, continuous around the clock trading. The SEC has already scheduled a “roundtable” on Sept. 17 to discuss shifts to 24-hour trading, and Chairman Paul Atkins said in a July 23 statement that the U.S. is “moving towards a new day – and night” when it comes to equity market trading.
Nasdaq tells Barron’s it’s concentrated on the successful rollout of 23-hour trading before looking ahead to 24/7 trading.
“We do see that the trend is toward continuous, always-on type of markets, and there’s a clear trend there, so we do understand that. But the pace and the structure of that evolution needs to be guided by the principles that drive what we do every day,” Mack says.
The direction of travel, however, appears clear: Investors are moving closer to a market that rarely closes. Whether that shift ultimately benefits retail investors as much as exchanges and professional traders remains to be seen.
“The problem with the push for 24/7 trading is all of a sudden the stock exchange has just become a casino,” Schiffrin says. “It’s really just a place to speculate and not invest.”