Extended trading hours – arguably one of the hottest topics in the industry at the moment. With some trading platforms in the US already offering after hours trading, and others exploring the notion, the question most debated when it comes to the topic lies with what impact this will have on the wider industry.
More specifically, how will this potential change affect the buy-side, sell-side, exchanges, tech providers, differently? These topics were unpacked in The TRADE’s extended trading hours-focused webinar, ’24/7 equities trading – A red herring or an inevitable reality?’.
Featuring industry experts from firms including T.Rowe Price, Glenmede Investment Management, Lazard Asset Management, and Clear Street, among others, the discussion explored all sides of the extended trading hours argument.
Is the buy-side hungry for extended trading hours?
It’s no secret that in the last few years, the markets have experienced a certain ‘democratisation’, with retail – particularly in the US – expanding and opening up the industry further. Embedded in this, is the concept of extending trading hours, to complement the new participants coming into the market, and suit the needs of those looking to trade outside of regular trading hours, with experts citing participants such as those in the APAC region.
However, discussions during the webinar turned towards whether the concept of expanding trading hours has grown enough within the industry to truly merit as much attention as it has done.
Speaking to this, Mehmet Kinak, global head of equity trading at T. Rowe Price, said: “From my perspective, the need for all exchanges to jump into this foray when there is on average 30 million shares trading seems a little early. I’m sceptical that we need that much of a change in our industry, but I’m also told that this is inevitable, and as technology and the DTCC support this, it’s only a matter of time.”
This sentiment was also reiterated by other speakers, including Melissa Hinmon, director of equity trading at Glenmede Investment Management, who shared that from Glenmede’s perspective, there is not yet an appetite for extended hours trading.
Data as a barrier
As discussions focused on what may drive institutional firms to move towards extended trading, participants in the webinar also highlighted a lack of data and trade reporting for overnight sessions as a possible hurdle. Specifically, for participants such as long-only firms, unlike hedge funds which may be looking for overnight trading, they are aiming to mitigate alpha slippage, therefore trading in an overnight session could pose problems of volatility and illiquidity.
This was also emphasised by Kinak, who said that for firms such as these, a lack of data and trade reporting makes it difficult to understand the makeup of what’s trading overnight.
He explained: “There’s no trade reporting facility that takes place during overnight hours, there’s no market best bid and offers (MBBOs) so you can’t see where the best quotes may be, what sizes they are, what’s being traded live during these sessions.
“Without that type of visibility, there is zero interest from an institutional perspective to jump into the fray, because we’re trying to balance our need for liquidity with reducing information leakage.”
Bifurcation between the buy- and sell-side
As the prospect of extended trading hours grows due to certain areas of demand across the industry, most notably, as previously discussed, from retail sectors and clients in the APAC region, between the buy- and sell-side, there appears to be a bifurcation of opinion. Specifically, a proportion of the sell-side are seemingly beginning to perk their ears up at the idea, while the buy-side still appears to be wary of taking part.
Explaining this, Jesse Forster, head of equity market structure and technology at Coalition Greenwich, commented: “On the sell-side, there is a bit of a fear of missing out, because no one really knows if it’s better to be the first mover, or the second mover, so there’s a mentality of where do we want to be? For the buy-side, however, there’s whispers of not really wanting this. Some opinions are that just because they want to interact with retail doesn’t mean they want to auction with them in this method.”
He also referenced the demand sector, adding: “Asian retail brokerage heads swear there is massive overnight demand among their client base once they get a US exchange as a seal of approval. It could be a case of it they build it, they will come, but if the US buy-side doesn’t come, we’ll end up with an even further bifurcated market.”
The potential liquidity impact that may come with extending trading hours was a further concern emphasised by experts during the webinar discussion, with particular reference to recent bouts of volatility and turbulence experienced over the past year.
However, for Peter Eliades, head of electronic execution at Clear Street, this confluence of volatility and extended trading may pose opportunities for clients looking at this form of trading.
He said: “Current administration has accelerated overnight and macro news flows, which has been exciting opportunistically for some clients, either to make more markets, or take some directional bets. The clients that are looking at this are okay with some volatility, and they’re looking for some episodic trading to help them either reduce risk or to get into positions they feel are aligned with their investment thesis.”
Challenges of ensuring firms have the correct staffing and infrastructure in place to support a shift to extended trading hours was also brought up in discussions, however for Kinak, addressing these issues is almost premature, in relation to some of the liquidity obstacles presented.
“We’re putting the cart ahead of the horse a little bit. We have a liquidity issue with overnight trading more than we have any portfolio manager or trader issue. If you look at the symbols that trade, it’s a lot of ETFs that firms like T. Rowe Price and Glenmede would not traffic in. We’re also trading in mid and small-cap names that don’t trade during the continuous session much, if at all.”
This was also supported by Hinmon, who added: “We have a responsibility to our institutional clients to ensure that we’re getting the best price for best execution. If we don’t have the metrics, the liquidity’s not there, and there’s extreme volatility, that’s a really hard thing to try to explain why we’re in the marketplace when there’s nothing really advantageous to our clients to be there.”
Comparing European and US liquidity
As discussions began to centre around how extending trading hours would impact the ways that firms access liquidity, experts on the webinar also drew comparisons between the US and Europe. Specifically, conversations emphasised the importance for those in Europe to look through a regional lens.
For Chris Collins, equity trader at Lazard Asset Management, introducing overnight trading may add to an already challenging liquidity problem faced by European firms; specifically, navigating overlap of trading when the US markets open, specifically referring to the greater volumes traded during the short periods when European markets coincide with US trading hours.
“In Europe we trade about a tenth of the volume on a daily basis compared to the US, so I think you run a risk,” he emphasised.
“The volume is massively concentrated into the two or less hours that overlap with the US. Even a market like Norway that’s open for 55 minutes overlapping with the US has half of its volume trading in that time.”
Collins also contrasted the makeup of the US and European markets, highlighting that the growth of demand for out-of-hours trading in the US is largely driven by the retail sector over there, which has a much bigger participation than in Europe. Specifically, he indicated that retail makes up 20-25% of the market, compared to approximately 5% in Europe.
“Whilst the 24-hour debate is getting very loud globally, and these discussions are important in Europe, it’s really important to look at the individual makeup of the markets and not just blindly follow what’s going on in the US. If you break down where the volumes are happening, even in the US, the vast majority of those volumes are still trading in the main six-and-a-half-hour window, so it’s a bit of a rounding error in the US, and even more so if translated to Europe.”
If you build it, will they come?
Despite some pushback around the prospect of introducing extending trading to the industry, with the webinar indicating that this is largely stemming from the buy-side, it appears that, as described by Collins, the “genie is out of the bottle.”
In particular, as the concept of extending trading hours is becoming more prominent in industry discussions, some sell-side firms are beginning to look to connect to these new markets, therefore creating the need for the technology and infrastructure to allow for these new ventures. Hence, from a technology vendor’s perspective, comes the “if we build it, they will buy it” argument.
For Arnaud Derasse, chief technology officer at trading, data and technology provider, Exegy, if there’s a market willingness or interest, it’s natural that the technology and automation required will also spring up around this.
He said: “We’ve seen a lot of traction in the past 12 months, specifically from the sell-side, so we’ve been building feed and execution coverage for all these new exchanges. Particularly on the broker side, there’s a willingness to see what’s available.
“From a tech point of view, there’s a kind of build it and they come perspective, and potentially we may see more liquidity as the products become more available.”
Looking ahead
As industry discussion around extended trading hours begins to roar louder, it appears that buy-side anticipation still lags behind the sell-side and other market participants. When questioned on whether the prospect is likely to materialise, experts in the webinar were quick to assure that across the US, there are too many ongoing commercial interests to stop overnight and extended trading from making their mark.
However, as Europe slowly comes up on the heels of its overseas counterpart, discussions are shifting to the need for ongoing dialogue and broader consultation, to ensure that whatever comes has the most positive impact on the industry.
Difference of opinion across different segments of the market seems to be a key driver behind uncertainty towards the prospect, as reiterated by Kinak, who asserted that “the real question is what juice is worth the squeeze here? Can we just extend the markets a little bit and make enough people happy or everyone equally dissatisfied to do enough?”
Perhaps if issues such as liquidity and provision of data can be resolved, the buy-side will increasingly warm to the prospect of extended trading hours. But for now, it appears that 24/7 trading will remain on the trading horizon is some shape or form, and its impact on all corners of the industry are likely to remain a central focus of discussion for the foreseeable future.