Lynn Strongin Dodds looks at the 24-hour trading trend sweeping over the equities and derivatives markets and the implications
Around the clock derivative markets moved one step closer with the Commodity Futures Trading Commission (CFTC) asking for public comment on the implications this would have on trading, clearing and risk management.
The consultation, which ends on 21 May, also seeks responses on the risks related to the areas of market integrity, customer protection, and retail trading.
“The CFTC must take a forward-looking approach to shifts in market structure to ensure our markets remain vibrant and resilient while protecting all participants,” acting Chairman Caroline Pham said in the press release. “One evolving trend is the move to 24/7, 24/6, or 24/5 trading hours.”
In addition, the CFTC is looking for input on offering perpetual futures, a type of contract popular outside the US and gaining traction in digital-asset trading. These contracts for cryptocurrencies have remained largely unavailable to Americans.
These contracts, often referred to as perps, have settlement, pricing, and calculation of margin, conducted on an ongoing basis, often multiple times a day. While they can be an attractive product for some traders, the “distinctions between the structure of existing derivatives contracts and the structure of perpetual contracts may raise novel questions and concerns related to trading and clearing risk management,” according to the regulator.
Recently, crypto exchange Kraken launched FX perpetual contracts for two major FX pairs, EUR/USD and GBP/USD while Coinbase announced plans in a blog to launch 24/7 bitcoin and ethereum futures contracts in the US.
Unlike traditional markets that close at the end of the trading day, the crypto markets have broken new ground for accessibility, allowing investors to trade whenever and wherever they want, with transactions occurring seamlessly across time zones. In fact, this round-the-clock availability is part of crypto’s appeal to global retail traders and institutions alike.
By contrast, traditional stock markets have fixed hours, typically 8-10 hours daily, with breaks and days off. However, things are changing with retail platforms such as Robinhood and Interactive brokers having blazed a trail in the past few years in the equity space with 24-hour trading to meet the growing demand of their customer base.
This year has also seen mainstream exchanges jump on the bandwagon with Nasdaq, home to several household name technology companies, and Cboe Global Markets both engaging with regulators to extend their trading day to 24 hours during the week.
Moreover, last October the New York Stock Exchange (NYSE), which is part of the InterContinental Exchange, signalled its intentions to lengthen the day for its Arca Equities Exchange to 22 hours to support global, exchange-based trading of all US-listed equity products.
The Securities and Exchange Commission (SEC) also gave the green light for 24 Exchange to operate 23 hours each workday platform to capitalise on the increasing appeal of the NYSE.
The start-up, which is backed by Steve Cohen’s Point72 Ventures fund, aims to enable retail and institutional customers anywhere in the world to trade in US equities via broker-dealers who are approved members of 24X National Exchange.
The NYSE data showed that off-hours trading volume has increased dramatically over the past five years. It accounts for over 11% of all US equity trading, with over 1.7bn shares traded daily which is more than double the just over 5% reported in Q1 2019.
While many industry participants welcome a longer trading day, there are also those that are more circumspect. For example, last July, the Securities Industry and Financial Markets Association (SIFMA) outlined some of their key concerns in a letter to the SEC. These included the effects on price transparency since fewer orders are likely to be available overnight to allow for effective price discovery as well as the impact on of start- and end-day auctions.
Higher costs were also red flags. Although algo orders can work independently to some extent, most brokers are unwilling to remove human oversight entirely. This means that 24-hour trading would require overnight traders, or staff in other time zones – both of which add financial and organisational overheads.
