Retail trading activity has ballooned and the number of new individuals investing has increased globally over the past decade – if you have $5 and a smartphone, you can be an investor.
Retail investors make up 20-35% of daily trading volume in the United States, United Kingdom and South Korea, and even larger percentages in India and China, where they account for 40% and 80% of daily trading volume, respectively.
With a meteoric rise in retail investor activity and a consistently strong demand for US equities, exchanges are exploring the possibility of 24/7 trading hours.
Extended trading hours enables global investors to trade during their waking hours and for US retail investors to trade before and after work, thus increasing activity and business for exchanges. But it raises critical questions on the necessary adaptions to market infrastructure, and the potential benefits (or consequences) for investors and institutions.
What is 24/7 trading?
The regular trading session for major US stock exchanges occurs between 9.30am and 4.00pm Eastern Standard Time (EST); if an investor trades “on-exchange” they trade between these hours. However, 24/7 trading, also referred to as extended trading hours, or overnight trading, would enable orders (for securities) to be placed and executed outside the regular trading session.
Brokerages, like Robinhood and Charles Schwab, already have extended trading hours (not yet 24/7) by using alternative trading systems (ATS) rather than stock exchanges. An alternative trading system is an US Securities and Exchange Commission (SEC)-regulated non-exchange computerized system that matches buys and sell orders of securities (i.e. stocks).
In November 2024, the SEC approved overnight trading for an exchange (24X National Exchange) and major US stock exchanges, Nasdaq and NYSE all have announced moves to extend trading hours, with Cboe Global Markets already having introduced extended trading hours in 2021.
With extended hour trading led by the US, the London Stock Exchange (LSEG) and the Hong Kong Exchanges and Clearing (HKEX) are exploring after hours trading, with HKEX already offering extended hours trading for derivatives.
Why extend trading hours?
Extended trading hours has several potential benefits. They make markets more accessible for global investors — and possibly can improve price efficiency, liquidity and smoother execution for those actively trading outside of 9.30am-4.00pm EST.
Foreign ownership of US equities has reached $16.8 trillion (17.8% of US equities) and saw a 97% increase since 2019. The 9.30am-4.00pm EST time is inconvenient for investors outside of the Eastern Standard Time zone. Most global investors in Europe, Middle East and North Africa (MENA) and Asia, have to stay up all night, and exchanges open well ahead of morning time for those on the West Coast.
Global investors are crucial to US markets, and in recent weeks, uncertainty in US markets has shifted focus to European equities and to other global markets as well. Proponents argue that 24/7 trading could possibly entice these global investors to remain in US markets, as well as and attract new global investors.
With improved trading hours, proponents of 24/7 trading on exchange argue liquidity would be improved for investors active during those times, leading to better order execution and tighter spreads. However, many retail investors will likely remain off-exchange, meaning these improvements in liquidity may primarily benefit professional and institutional investors.
Proponents also argue that 24/7 trading may improve price efficiency. We live in 24-hour news cycle, but our (on-exchange) markets can only react between 9.30 am-4.00 pm EST. With major corporate actions and earning announcements occurring after trading hours, 24/7 may improve price efficiency as information would be incorporated into stock prices in real-time.
What are the concerns around 24/7 trading?
24/7 trading as of now most often occurs on alternative trading systems most commonly referred to dark pools. This type of ATS were originally created to enable institutional investors to make large trades without creating price inefficiency.
They are called dark pools for a reason – trades and prices only contribute to public price discovery after trades are executed. Though Financial Industry Regulatory Authority (FINRA) and the SEC actively monitor and regulate alternative trading systems 24/7 trading on dark pools raise some eyebrows.
Retail investors involved in 24/7 or 24/5 trading using ATS known as dark pools can face lower liquidity, higher price volatility and wider bid-ask spreads, as national best bid and offer (NBBO) protections are less effective outside of regular trading hours. With only so many investors engaged in after-hours trading, there is also no guarantee of order execution and small spreads.
Many economists raise concerns that 24/7 trading may yield lower volumes, inefficient price discovery and significant volatility swings from 24 hours trading and news cycle.
It’s not only the economics of 24/7 that worries the investing ecosystem – it's the feasibility.
How do you staff a 24-hour trading exchange? How will daily trading volume be defined?
What is opening and closing price of an equity? How does this change how current US financial services firm operate, and what does this mean for overnight monitoring of price?
For financial market infrastructure players and professional investors, it’s critical to monitor major price movements – the reality of staffing an exchange or an investment firm in New York that exists in a 24/7 trading world garners a few questions. Now imagine this for an individual, while they don’t need to monitor stock prices 24/7, the constant looming volatility of the market could create new levels of anxiety and uncertainty.
At the end of the day, 24/7 trading can improve access and opportunity for retail investors and further democratize capital markets. But some economists have raised concerns that increased trading hours can lead to lower returns, worse price efficiency and liquidity.
With current SEC approvals and the announced strategy from the New York Stock Exchange and Nasdaq, the move toward 24/7, or at least toward extended trading hours for the major US exchanges is inevitable. The real question is, how can institutions best prepare to ensure trading remains efficient, transparent and resilient?
Weforum