This week, the Commodity Futures and Trading Commission (CFTC) has issued a request for public comment on the subject of 24/7 trading—the latest in a long line of developments that signal regulators and financial market infrastructures are moving closer to allowing/pushing the industry to be ‘on’ permanently. 

Virginie O’Shea, founder, Firebrand Research

I have been monitoring the progress of the 24/5 (and similar variants) trading applications in the US market over the last 12 months with interest. It began in equities and as I predicted, it is now moving into other areas like derivatives (we’re just waiting now for Europe and Asia to get on the bandwagon). Anyone that read my blog from this time last year ‘Does the industry really want to be on 24/7?’ will know that I’m concerned about the potential negative impact the move could have on our lives from a liquidity and post-trade support perspective, but there are other considerations from an investor protection standpoint as well. 

To highlight these issues, I’ll refer to the recent work of another regulator. The UK’s Financial Conduct Authority (FCA) recently published a study about the risk-taking behaviour of the country’s relatively modest (in comparison to the US market at least) community of retail traders (check out the full study here). Its interest was spurred by the introduction of consumer duty requirements last year that aim to improve financial institutions’ care of duty when it comes to protecting end investors. The focus of the FCA research is specifically on the gamification of retail trading applications and the potentially higher level of risk-taking this encourages. 

The FCA behavioural analysis notes that younger retail traders are especially vulnerable to influence by digital engagement practices (essentially the bells and fanfares and gold stars you get for engaging in trading on these apps) and that these individuals are generally taking much greater risks and receiving poorer returns as a result. What’s interesting about the findings from a 24/7 perspective is that these activities are largely taking place between 23:00 and 06:00 – i.e. late night. So, late night trading combined with gamified trading apps is encouraging retail investors to act in an excessively risky manner. 

Now, turn back to the US market, where 24/5 trading is being considered and think about what that might mean against the backdrop of deregulation. If, as is being touted by the incoming regulators at the CFTC and the Securities and Exchange Commission (SEC), regulation is being scaled back, will investor protection be hampered? If investor protection and enforcement are being deescalated in favour of innovation and trading app “innovation” encouraged rather than policed, what could be the outcome? 

These are sobering thoughts for those worrying about investor protection. Younger retail traders may not have a solid investment background and understanding of what they are getting into. The influence of social media and trading apps could combine to negatively impact a large community and by extension, the economy. 

Late nights often mean tired minds and poor decisions. That can be applied to the institutional market as much as it can the retail market. Risk management is challenging at the best of times, how will we cope with this new world? After all, remember that artificial ntelligence can only do so much. Operational resilience has already been tested in current conditions, what can we expect around the corner? Let’s hope a sensible and reasoned debate is held by the CFTC and (inevitably) its peers around the globe in the coming 12 months about what this “innovation” actually means in practice.