Around-the-clock (24/7) trading is something we already see in the foreign exchange markets and the growing cryptocurrency landscape. Yet with equities, these markets are constrained by market hours which may be specific to a region and/or exchanges themselves.
Major equity markets including the New York Stock Exchange (NYSE), NASDAQ, the London Stock Exchange (LSE) and Tokyo Stock Exchange (TSE) all tend to have trading periods that range between 6-9 hours daily, with markets closed over the weekends and on major holidays. Some exchanges do offer pre-market and after-hours trading sessions, where limited trading activity occurs outside regular trading hours. These extended trading sessions are, however, less liquid and tend to have different rules and regulations that need to be followed when compared to regular trading hours.
On the other hand, foreign exchange – the largest financial market in the world – benefits from the fact that trading is not limited to one central location but is instead conducted between participants by phone and electronic communication networks (ECNs) in a wide range of markets globally. Foreign exchange markets are open 24/7 in different parts of the world from 5 pm EST on Sunday until 4 pm EST on Friday. This means that at any moment in time, there is at least one market open, with some overlaps existing between one region’s market closing and the opening of another. This allows traders worldwide to be able to meet the demand for a particular currency at any given time.
Similarly, cryptocurrencies have gained appeal due to their ability to be traded 24/7, including on weekends and holidays. Unlike traditional financial markets, such as the equities space, cryptocurrencies are not limited by set trading hours and can operate continuously – given that they are decentralised and traded across a range of global exchanges, allowing participants to buy, sell and trade cryptocurrencies at any time.
Whether equities will mirror the around-the-clock model favoured in the foreign exchange and cryptocurrency markets is yet to be seen, with varying viewpoints on whether demand for it exists and whether or not the shift is even feasible.
Recent technology initiatives suggest a renewed appetite for around-the-clock trading in equities but given the markets were debating the shortening of trading hours just a few short years ago, it begs the question if this is something the equities market participants want or need.
“Already in EMEA, we have six valid trading days. With Middle East and North Africa (MENA) becoming a larger part of indices and portfolio managers’ thinking, decisions will have to be taken around how best to trade these markets. Each asset manager will need to consider the balance between the cost and benefit,” says Stuart Lawrence, head of UK equity trading at UBS Asset Management.
If equities markets were to offer 24/7 trading, operational changes would have to occur to allow exchanges to accommodate this shift. As seen with the upcoming shift to T+1 settlements in the US, Mexico and Canada next May, institutions will have to rethink the way their operations are set up to allow a more continuous method of trading globally.
“The move to T+1 will affect trading desks where FX transactions need to be undertaken,” notes Lawrence. “Non-USD based account asset managers investing in US and Canadian securities need to be able to generate and execute FX trades at the end of the US day – there is no longer time to leave it all to the next day as not all pairs with all custodians can settle T+0.”
The same will be the case if the equities markets were to move to a 24/7 execution model. Staffing of desks would have to be very different to allow for continuous trading, using varying methods including follow-the-sun and positioning various support desks around the globe to allow for shift work.
For larger institutions, which may already have a global presence, this shift will be a lot more feasible than for smaller ones, given that these firms will already have employees operating across the world.
“For a follow-the-sun based global organisation, increasing headcount a little bit and adding in new processes, more capabilities and ensuring smooth handovers between time zones is not without risk, but it’s probably a bit easier than it is for a relatively small local bank who trades in their home market and not much else,” says Adrian Ip, managing director, product technology and sales at Aquis Exchange.
For smaller firms, on the other hand, incorporating continuous trading within equities would likely require either setting up new shops in different locations to allow for around-the-clock trading, or outsourcing trading for certain markets – with both presenting additional costs.
“As the global economy becomes increasinly flexible on working from home, it might be the case that you have some traders trading from home late at night or early in the morning, or both,” notes JW Verret, associate law professor at George Mason.
“For exchanges, I think as execution shifts to 24/7, exchanges will have to go global to survive. Trading desks will have to look to globalise as well. The global demand for 24/7 will push domestic institutions to find global partners.”
The role of technology
When looking at a potential shift to 24/7 trading in the equities space, there are several potential barriers that exist which could prevent the move. These predominantly relate to technology, regulation and market structure, alongside the most significant hurdle – whether or not market makers and participants are prepared to make this shift at all.
Earlier this year, Aquis Technologies – a division of Aquis Exchange – launched what it claims to be the world’s first regulated market-grade 24/7 matching engine for both existing and start-up exchanges, named Aquis Equinox, which never requires shut down or down time.
The development – which covers a wide range of asset classes including equities, ETFs, fixed income, derivatives, crypto and tokenised assets – allows exchanges running on Aquis Equinox to guarantee continuous operation, without the need for shutdown to facilitate software upgrades, infrastructure changes, capacity increases, reference data management or member onboarding.
“Up until we launched Equinox, the concept of 24/7 trading of equities, or any other asset class, was always a theoretical discussion with some vague possibilities subject to market participants liquidity capabilities, regulators and technological restrictions. It was never an absolute that we can have a market that runs forever. With Equinox, the technological problem is now no longer the bottleneck in this,” says Ip.
“Equinox enables clients to do everything from sequence number resets to instrument and member onboarding alongside real-time software upgrades without having to stop trading, now we pass the baton to regulators and market participants to solve the remaining hurdles.”
For the buy-side specifically, having an order management system (OMS) or execution management system (EMS) that can be used on a global basis is essential to 24/7 execution in equities – allowing all regions to operate seamlessly and communicate with one another on the same platform in order to reduce risk and avoid duplications, which is particularly important for large organisations with bigger trade flows.
“This uniform approach, one which UBS AM uses, ensures smooth transition between desks as we move through the day,” notes Lawrence. “In addition, you need a global transaction cost analysis product and means of communicating in real time, neither of which are onerous requirements.”
Pros and cons
As with any potential move within the global financial markets, benefits associated with a major market structure shift need to be weighed against the negatives. A shift to 24/7 trading in equities could help remove friction associated with access to markets, mirroring the foreign exchange and cryptocurrencies that can be accessed at any time and from any location. Given different time zones, interested participants may be limited to trading stocks in their local region due to lack of access to other markets. Some people may be interested in trading in other markets but may only catch the tail end of the trading day, if at all.
“We’ve seen a massive period of globalisation over decades if not centuries,” highlights Ip. “What that has meant is that a lot of people around the world in the last 20-30 years start talking about their stock portfolio, including equities from other countries and other regions around the world than their home market. The more that you can do that and the more that you can get greater participation round the clock, it fuels greater liquidity and gives investors worldwide the opportunity to easily access and trade their desired portfolios regardless of region and time zone.”
Highly liquid markets have predominantly been driven by institutional firms, market makers and high frequency traders (HFTs) in the past, but the retail segment is growing. Retail investors contribute an increasingly chunky piece of liquidity to the markets across the globe, particularly in equities, and 24/7 access to additional markets could see this boosted further.
“If you have retail investors that are putting orders out there, able to interact with real markets around-the-clock – that gives you greater liquidity, which makes these markets ultimately more stable, better for long term growth and everything else that we know that liquidity drives,” adds Ip.
The equities markets’ current trading model that offers accessibility during specific trading hours currently limits retail participants, even domestically, who want to participate in the market. Individual investors, who may be occupied during existing trading hours due to realities such as their own jobs, may not be able to carry out trades when markets are open. Not only could 24/7 trading in equities benefit market participants who want to access markets outside of their own region, but also those domestically who cannot access markets during existing trading hours.
In The TRADE’s recent roundtable, Dirk Donker, head of Euronext retail services, notes that “We are seeing a bigger demand for trading ‘after hours’. [To have more of an overlap with the US] is absolutely an element that we need to consider because a lot of the population of Europe is trading US stocks so in that sense we need to align.”
Introducing 24/7 trading within equities could also promote increased fairness among markets, to both institutional firms and retail traders. Currently, futures markets can be used for US equities after trading hours close, however, it is not as liquid as the equity market itself.
“The need to switch to futures markets after close is just an artificial friction in the market and I think getting rid of it will be fairer and more efficient, particularly for those institutions and hedge funds that exist across border,” argues Verret.
The possibility of extending market hours is something participants have expressed concern over in the last few years.
In 2020, buy- and sell-side traders called on the London Stock Exchange and other European venues to shorten equity market opening hours to 9 am to 4 pm GMT in a bid to improve culture and diversity on trading floors and boost intraday liquidity, in response to several industry consultations.
However, following significant debate, exchanges later rejected these bids, stating that the move would not act as a silver bullet solution for the complex issues around diversity and mental health.
“When considering extensions, there must be conversations around – and recognition of – the health and well-being of traders,” notes Lawrence. “Any changes to our trading days would likely require changes to the coverage model, and potentially increase costs.”
Elsewhere, given the growing portion of volumes now being executed during the close in Europe – now upwards of 30% of daily volumes – and the impact it is having on liquidity in the continuous trading day, extending market hours now could be seen as counterintuitive. Not to mention the previous bid by participants to improve intraday liquidity by shortening the daily trading period.
The SEC’s new market structure proposals
The US Securities and Exchange Commission (SEC) proposed four separate rulemakings in December last year, which represent the most significant attempt to revamp market structure for US equities in recent memory.
One of the potential ramifications of the proposals – if they were to come to pass – is that they will change the competitive dynamic for exchanges and trade execution, alongside changing the dynamic for cross-border consolidation of exchanges, which could ultimately help facilitate 24/7 trading in equities.
Given that there were only a couple of dominant players in the US, namely NYSE and Nasdaq, it has previously been difficult to get cross-border merger and acquisition activity between exchanges.
“It’s a long overdue regulatory shift from the SEC that is going to take market share from NYSE and NASDAQ and distribute it among the other 13 exchanges, and that’s going to change the competitive dynamic – such that cross-border consolidation is going to become easier and we’re going to see more joint ventures, more buyouts, more mergers between different regions and that’s an important part of the 24/7 story,” notes Verret.
“The regulatory change prompts competitive change, the competitive change prompts global consolidation of exchanges and that is what I think ultimately leads to the 24/7 trading environment.”
Are we on the way to 24/7 trading?
Whether or not equities will eventually mirror the 24/7 trading environments we see within the foreign exchange and cryptocurrency markets is yet to be seen. Technological advances have been made which suggest it could be feasible, however, whether the industry deems the concept fit for purpose in equities is still a debatable prospect.
“Trading 24 hours a day, seven days a week is extreme and I see no immediate demand or need for it,” argues Lawrence. “However, we will see an increase in coverage requirements and there are some benefits to the change. Foremost is smooth and continuous trading, meaning an asset manager can work on a global level with minimum hinderance. Utilising regional desks improves local understanding and creates market knowledge specialists who can leverage their expertise rather than relying on one generalist desk for global coverage.”