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Spotlight-blackInnovations in Trading and Technology (more stories)

06 March 2013

Extended Trading Hours: The Early Bird Gets the Worm

As exchanges extend the trading day, many firms are looking at the hours before and after the markets close to find liquidity.

With volumes down globally, no method of finding liquidity is off the table, and many market participants are embracing the trend of extended market hours. Pre-market and after-hours trading provide smaller amounts of liquidity than are available during the trading day, but it is liquidity nonetheless. And many firms are looking at the hours before and after the markets close to try to figure out how to make the most of them.

Last week ConvergEx became the first firm to offer a pre-market trading algorithm. According to ConvergEx, the algorithm takes into account the increased volatility of pre-market trading. The introduction of the algorithm should be great news to Nasdaq OMX, as just last month the exchange operator announcedthat it would be offering traders earlier hours, pushing up its current 7 a.m. pre-market start time to 4 a.m. The change would take effect no earlier than March 18, as it is pending approval by the SEC. Presumably, Nasdaq is working to compete with NYSE Euronext, which began a pre-dawn trading session in 2005. With these two exchanges leading the charge, other exchanges are undoubtedly following their progress closely while debating whether to follow suit.

Expanding the pre-market arena isn’t the only way exchanges have enabled additional trading time. Last year ICE started offering grain futures 22 hours per day. In response, last May CME Group also expanded its trading hours for grain and oilseed markets, from 17 hours a day to 21 hours, though it announced this week that it would cut back grain and soy futures trading to 17.5 hours.

Exchanges are also capitalizing on cross listing, or listing a product on an exchange other than the home market where the underlying securities reside. By using exchanges around the globe, products can be traded at any time. The Korean Stock Exchange’s Kospi 200 index, for example, is traded essentially 24-hours a day, after cross listing with Eurex.

There are more benefits to longer trading hours than additional liquidity. Pre-market and after-hours trading also allow traders to take advantage of earnings reports and other market-related news releases. For example, the extended trading hours introduced by ICE and CME Group last year enabled for the first time the trading of futures as the USDA releases its grain reports.

Despite the enthusiasm among some participants for extended trading hours, however, there are challenges. CME Group reversed its seven-month-old decision to extend grain futures trading hours after a backlash from traders who were unhappy with the change. Traders complained that the longer hours provided little additional liquidity, and some argued that a faster reaction to market reports isn’t always best for the market -- considering some reports are hundreds of pages long, traders hardly have time to carefully read them in order to gauge how to trade.

CME Group’s setback highlights questions around the trend. During trading periods that are defined by less liquidity and more volatility, one has to wonder if the effort is worth it. What will be required of traders as exchanges keep pushing the boundaries of trading hours? Are the longer hours really better if traders don’t have the time to make informed decisions on market information?

Even though questions loom about expanding trading windows, time still equals money. By increasing the amount of trading time, one can expect, logically, to receive some increase in profits. On top of this, exchanges face the pressure of competition. An innovation on one exchange often forces others to enhance their systems, as each one is seeking the proverbial worm for itself.

Spotlight-white-trans For more stories in the Innovations in Trading and Technology Spotlight Series click here.

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2 Comments to "Extended Trading Hours: The Early Bird Gets the Worm":
  • Comment_230146_210851315613283_100000652474653_678322_2285980_n
    crammond1964

    07 March 2013

    if  9 /11 happened at 4.30 am our markets would of broken !

    Here is a clear message why exchanges now need governance from outside regulators !

    Exchanges have to provide orderly markets and LIFFE and its 2 AM openings have totally failed and provided no liquidity and traders reluctant to place overnight orders as their stops at this time of morning would resemble MAY 6TH  2010 ; have we learnt anything from that disaster ?

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  • Missing
    anonymole

    07 March 2013

    Such decisions to extend market hours only substantiates the premise that for profit exchanges' only directive is profit. Expanding their bottom line, by any means, is their only goal. Creating a stable, equitable, continuous market is second only to profit, and is only on the list as forgoing such stipulations would reduce their bottom line. Face it, systems like banking and market exchanges should be created and regulated like utilities.

     

    As far as trading hours go - why should exchanges be given the ability to control when an instrument should be tradable? 24x7 should be the norm for every trading vehicle. Trading hours are only a throwback to humanities agrarian past. Continuous trading is more than possible in this day and age.

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