Crypto markets trade 24 hours a day, seven days a week, which has led to discussions on whether traditional financial markets will move in the same direction, particularly as the volume of electronic trading has grown. Researchers have suggested that moving to a longer trading day in equities could be beneficial, but moving to 24/7 trading could harm liquidity.

Jim Toes, president & chief executive of STA, said in a blog that one of the takeaways from the trade body’s market structure conference last month was that 24-hour trading appears inevitable. The STA conference hosted a panel which included Blue Ocean Technologies, Imperative Execution, Liquidnet and OTC Markets who discussed 24-hour trading. Bryan Hyndman, chief executive and president of Blue Ocean, which supports overnight trading of US equities, said 24-hour trading is not currently possible because trade reporting is batched but he expects that to evolve. He predicted that trading will be 24/5 in a few years time according to the blog.

Retail brokers, including Robinhood and Interactive Brokers, already offer 24/5 access to US stocks. In April this year, the New York Stock Exchange surveyed market participants on whether trading hours should be extended to 24 hours during the week, and also at weekends. In addition, 24 Exchange, backed by Steve Cohen’s Point72 Ventures fund, has also filed with the US Securities and Commission Exchange to launch the first round-the-clock exchange.  In the filing 24X said it plans to operate a fully automated electronic trading platform for the trading of listed NMS stocks 23 hours per day, 7 days per week, including certain holidays.

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 recently published a paper, Is 24/7 Trading Better?  

They said in a blog that trading hours have traditionally mirrored the conventional workday due to the need for human involvement in trading, but the situation has changed as between 70% and 80 % of volume now comes from algorithmic trading. The research examined the costs and benefits of extending trading hours, including eliminating market closures. The paper said that limiting trading times would constrain investment opportunities. e.g if news breaks outside market hours, but found 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,” said Blonien and Ober.

For example, they argued that liquidity begets liquidity as a market closure approaches. As a result, closures allow traders to coordinate liquidity that would otherwise be spread thinly throughout time.

“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,” added the researchers. “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.”

Allocative efficiency is an aggregate measure of traders’ ability to reach desirable inventory positions. The paper concluded that 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.

The research also examined the optimal length of a market closure and said it depends on parameters that describe the market. In larger, fairly liquid markets the optimal length of closure is relatively short.

“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,” said the paper.

In addition, the paper highlighted that some research has suggested that gamification of the market through extended trading hours could result in worse outcomes for retail traders.

CFTC roundtable

A roundtable hosted by the Commodity Futures Trading Commission’s Division of Clearing and Risk on 16 October in Washington, D.C included a discussion of 24/7 trading in the derivatives market.

Most attendees at the roundtable voted by a show of hands that non-interrupted 24/7 derivatives trading should be permitted. However, they also wanted guardrails which could include pre-funding, the qualifications of traders or restricting extended hours to structural clearing organizations.

There were questions around risk management and how to margin positions that are open on a 24/7 basis, or how to transfer value when banks are not open. Futures commission merchants (FCMs) and CFTC-regulated derivatives clearing organizations (DCOs) currently work together to manage risk within the ecosystem, and extending trading hours would likely require additional work, and involve additional risks, for both of them. One participant said: “This market structure has demonstrated that it performs well over a variety of market conditions so that is most likely the best path forward.”

Another participant highlighted that firms need time to process data for regulatory reporting requirements. He said: “If you want to do 23 hours and 15 or 45 minutes, I think I’m on board with that. We need time to process and handle all the information at least once a day, because that is how time is measured by regulators.”

Demetri Karousos, president of Nodal Clear, said at the roundtable that the clearinghouse is supportive of 24/7 trading and clearing, but the key is risk management. Core principals include having a robust pre-trade risk regime in place and real-time position monitoring across the whole portfolio to ensure participants have the appropriate trading capacity.

“That means not at-trade and not post-trade,” he added. “Pre-trade means before an order hits the order book, and that is critical.”

Nodal Clear already operates a mid-day margin cycle, which is identical to the end of day margin cycle and Karousos highlighted that trading continues during the mid-day margin cycle.

JB Mackenzie, general manager, futures & international at Robinhood,  said at the round table that 24/7 trading is something that the derivatives industry will have to do due to global trading and market demand, as otherwise investors will move to unregulated markets.

“As an FCM, we run a 24/7 risk management program with real-time risk analysis so that when markets open we can take action as necessary,” said Mackenzie. “I think the market is going to have to evolve and it has to be in baby steps.”

In some cases Robinhood can move collateral 24/7, especially to support digital asset trading, and in markets such as Singapore. Mackenzie continued that the question is what type of collateral should be allowed to be used over the weekend, such as stablecoins, and how the industry evolves to that.

Allison Lurton, general counsel and chief legal officer, at the FIA said at the roundtable that the trade association for exchange-traded derivatives supports the operational efficiencies that the industry is trying to capture from 24/7 trading, but that is difficult with a lack of 24/7 collateral movement and settlement.

Dave Olsen, president and chief Investment officer at Jump Trading Group, suggested at the roundtable that the CFTC picks a pilot market, where the global infrastructure needs to be put in place to test the trading of a contract on a 24/7 basis. He said: “Moving forward, the US needs to  catch up with a lot of the global marketplace.”