The 24-hour Stock Market is Booming - and Wall Street is Rattled

Wall Street professionals are once again feeling uneasy about retail investors. This time, the concern isn't about the trades they're making but about the timing of those trades. The rise of amateur investing, which has surged since the pandemic, is contributing to a boom in overnight stock trading. Platforms like Robinhood Markets Inc. and Interactive Brokers Group Inc. are offering the buying and selling of American shares 24 hours a day, five days a week.

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This development has effectively removed the traditional eight-hour overnight break. The move has proven so popular that even the "pink sheet" market, home to companies that can't or won't join a major exchange, is set to enter this continuous trading environment in July. However, as the popularity of overnight trading grows, some industry players are raising significant concerns.

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Joseph Saluzzi, co-head of equity trading at Themis Trading LLC, worries about the potential problems that could arise during illiquid overnight trading. He cites recent instances of substantial moves during unexpected times, such as a 20% surge in GameStop Corp. on a Sunday evening. Saluzzi fears that someone could exploit the slow overnight trading to create momentum in a share, driving it higher for a quick profit.

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Beyond market manipulation, there are other concerns, including the impact on mental health from a market that never sleeps and the potential for U.S. stocks to draw even more capital away from struggling overseas markets. Regulators are considering an application from a Steve Cohen-backed firm to create the first 24-hour stock exchange and have stressed the need for protections against fraud. The New York Stock Exchange (NYSE), which sparked the debate in April by polling industry participants about nonstop trading, has yet to publish its findings and has emphasized the work needed to ensure the market's readiness.

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Current Market Structure
The cash market for U.S. equities currently operates from 9:30 a.m. to 4 p.m. in New York, five days a week. This is supplemented by electronic trading sessions that start at 4 a.m. (pre-market) and extend until 8 p.m. (post-market). Overnight trading platforms match orders within their systems or use specialized platforms, allowing trades throughout the night via private share sales rather than publicly recorded transactions. This has effectively moved the start of the stock-trading week to 8 p.m. on Sunday, eight hours before the official pre-market begins.

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Brian Hyndman, CEO of Blue Ocean Technologies LLC, the largest dedicated overnight trading platform in the U.S., believes that 24-hour trading will become mainstream within a few years. He argues that investors want to trade when it’s convenient for them and when the time is right, reacting to market-moving events whenever they occur.

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Benefits for Retail Traders and International Investors
Overnight trading offers several advantages. Retail traders, who often cannot trade during business hours, benefit from the extended hours, as do international investors who want to participate in U.S. markets from different time zones. Interactive Brokers introduced overnight trading in 2022 due to demand from European and Asian investors. The firm has seen a 308% increase in overnight trades through June 2023, with these trades now accounting for about 2.2% of its overall U.S. share volume.

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At Blue Ocean, the average number of stock transactions per night reached 40 million shares in May. Despite this growth, overnight trading still pales compared to the average 12 billion shares traded during regular hours, highlighting the risk of significant price moves in relatively shallow volumes. To mitigate this, firms limit the size of price moves and only accept limit orders, providing a layer of protection for investors.

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Concerns and Protections
Bloomberg Intelligence found that nearly three-quarters of stock volume on Blue Ocean involved illiquid names, compared to just 16.6% on major trading venues during regular hours. This raises concerns about the potential for extra spreads when trading overnight. Proponents argue that as overnight volumes increase, issues like illiquidity and wide spreads will naturally decrease, creating a virtuous circle that improves market depth and breadth.

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Despite the potential benefits, Wall Street remains cautious about round-the-clock trading. Firms like TD Ameritrade Inc., now part of Charles Schwab Corp., have previously experimented with 24-hour trading but have limited their offerings to mitigate risks. OTC Markets Group Inc. plans to launch its overnight platform in July, starting with a small group of shares and providing full transparency about volumes and price changes.

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Impact on Mental Health and Investment Decisions
A market that never sleeps could have adverse effects on mental health, particularly for professionals who feel pressured to monitor the market constantly. It could also fuel short-term speculation at the expense of long-term investment strategies. Research suggests that limiting trading hours can improve investment performance by curbing active retail trading.

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Regulatory and Practical Challenges
After-hours trading already accounts for a significant portion of volumes at platforms like Robinhood. The demand for 24-hour trading has led 24 Exchange, a firm backed by billionaire Cohen, to seek approval for a 24-hour stock exchange. The U.S. Securities and Exchange Commission (SEC) is reviewing applications for round-the-clock trading, with a focus on ensuring protections against fraud and manipulation.

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Clearing trades is a major challenge for 24-hour stock trading. Currently, clearing houses do not operate on weekends, limiting 24-hour trading to five days a week. The National Securities Clearing Corporation is discussing extending its hours, but any change would require industry-wide consensus and regulatory approval.

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While the NYSE acknowledges the potential benefits of 24-hour trading, it emphasizes the need to address infrastructure challenges before implementing such a system. Overseas markets are likely to watch these developments closely, wary of the potential for further capital to flow into U.S. equities at their expense.

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In conclusion, while 24-hour stock trading offers significant benefits for retail and international investors, it also raises concerns about market manipulation, mental health, and the potential impact on global markets. Regulators and industry players must carefully balance these factors to ensure a stable and fair trading environment.

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