Quick look
Wall Street is preparing to stay awake longer. As major exchanges move toward a 23-hours-a-day, five-days-a-week trading schedule, Iowa State finance researcher Bidisha Chakrabarty discusses the shift to expanded trading hours, why it’s happening, and the opportunities, risks and realities behind an always-on market.
AMES, Iowa – Picture 2 a.m. in central Iowa. Almost everyone is asleep.
But on a phone on a nightstand, shares of company stock are changing hands. An investor in Seoul may be buying while someone in Des Moines is selling.
The market is wide awake.
“For generations, U.S. stock exchanges have hit the pause button every night, and Americans have thought of the stock market as a daytime institution that opens at 9:30 a.m. Eastern and closes at 4 p.m., Monday through Friday,” said Bidisha Chakrabarty, Dean’s Endowed Professor in Finance and chair of the department of finance at Iowa State University.
But change is coming, Chakrabarty said.
Starting in early December, the U.S. stock market will move toward an expanded 23×5 trading schedule – open roughly 23 hours a day, five days a week, with a one-hour daily break for system maintenance – marking “the most significant expansion of trading hours for U.S. national securities exchanges in decades,” Chakrabarty said.
The expanded schedule applies to U.S.-listed stocks and exchange-traded funds, and will run only on the exchanges that opt in. This includes the nation’s two largest exchanges, Nasdaq and the New York Stock Exchanges, which are both targeting a Dec. 6 launch for 23×5 trading.
“You might say to yourself, ‘I live in Iowa. I’m not a day trader. Why should I care?'” said Chakrabarty, who was in virtual attendance during a recent U.S. Securities and Exchange Commission (SEC) roundtable discussion on preparations for expanded trading hours.
“But if you have a 401(k), a pension or a college savings account, you already own a piece of this changing market, and the rules governing when and how stocks trade are the plumbing underneath all of it – mostly invisible when it works, but important when it doesn’t.”
As the shift to expanded trading hours approaches, Chakrabarty answered some questions about what it could mean for investors, financial institutions and the market itself.
Q: Does the change to 23×5 trading mean the traditional stock market day is going away?
A: That’s a good question, and the answer is no. Regular trading hours will remain 9:30 a.m. to 4 p.m. Eastern, and those hours will continue to serve as the market’s primary session. But the expansion into an overnight trading session will give investors more flexibility.
Instead of waiting for the market to open in the morning, for example, investors will have the ability to react to company earnings, economic news or global news almost any time during the workweek. The change will also meet a growing demand from investors around the world who want easier access to U.S. stocks.
A: Will everyday investors be able to trade on the new schedule or will access depend on their brokerage?
Q: It depends on the brokerage. Individual investors cannot trade directly with an exchange, of course. That isn’t changing. They must go through a broker that is a member of the participating exchange and has chosen to offer overnight trading. Brokers may limit which stocks or order types they allow, and the exchanges require “limit orders” overnight, not market orders. A limit order ensures you buy at your specified maximum price or sell at your minimum price or better.
And since the shift to 23×5 trading isn’t effective until early December, we don’t yet know which brokers will participate. But brokers earn money when investors trade, so they have the incentive to facilitate.
Q: Your research focuses on market structure, trading and financial disclosure. When you look at this transition to 23×5 trading, what do you see as the most important thing to understand?
A: Simply put, a market being open is not the same as a market being deep. There has always been some trading in U.S. stocks outside regular hours, but what is changing is the scale of that activity. And while overnight trading has been increasing, it currently represents less than 1% of total U.S. stock-market volume. Additionally, the trading that currently occurs overnight is highly concentrated, with the 10 most actively traded stocks accounting for 43.4% of overnight share volume. With exchanges preparing for expanded schedules, that scale and concentration can now change.
Q: Why does that change matter?
A: When a market is busy, there are many buyers and sellers, and the market is considered liquid. It’s easier to find someone willing to trade at a price close to the one you expect. But when a market isn’t busy – also called a “thin” market – the gap between what buyers are willing to pay and sellers are willing to accept widens. Prices can move sharply on relatively little trading, and an investor may receive a substantially different price from what they expected.
Many Iowans already understand this because corn, soybean and livestock futures traded on Chicago exchanges have long provided farmers, cooperatives and businesses with the ability to manage risk around the clock. But anyone who has watched an overnight futures market knows that open does not necessarily mean liquid. A price available at 2 a.m. may not be the price available at noon.
That experience from agricultural markets offers a useful lesson for the stock market. Being able to trade at 2 a.m. is not necessarily the same as being able to trade well at 2 a.m.
Q: What are some of the primary benefits of expanded trading hours?
A: There are certainly some benefits to a 23×5 trading schedule. For example, investors in Tokyo, Frankfurt and other parts of the world will have greater opportunities to trade U.S. stocks during their own waking hours. Investors who want to respond to important news in the evening will not necessarily have to wait until the next morning. And when information is incorporated into prices sooner, markets may be able to reflect that information more quickly. But at the same time, greater access also creates new questions.
Q: What are some of those new questions?
A: Consider an investor who sees breaking news at 11 p.m. and immediately reaches for a phone. The ability to trade is convenient. But convenience is not the same thing as good decision-making. Overnight markets are thinner, and investors may be making decisions when they are tired, distracted or less attentive to trading costs.
A market that is always open can also encourage us to trade more often, which is not always beneficial for long-term investors. And there is another important issue: the infrastructure underneath the market.
A stock trade is not finished the moment someone clicks “buy.” Trades must be cleared and settled. Brokers, banks, exchanges and other financial institutions must maintain systems, monitor markets, manage cybersecurity risks and respond to failures. The SEC’s recent roundtable specifically focused on these issues. We can extend the trading day but cannot just assume that every piece of the financial system underneath it is ready to operate identically around the clock.
That is why the transition deserves attention, not because 24-hour trading is inherently good or bad, but because changing the hours of the market changes the environment in which investors, companies and financial institutions operate.
Q: What do business leaders need to consider around this shift?
A: There is a lot for business leaders to figure out. Some immediate considerations will be a need review their disclosure, communications and corporate-action policies, and any contracts that refer to “market close” or “trading day.” Overnight news can now move their stock price when no one is in the office, and public companies cannot opt out of overnight trading in their shares. Leaders will need to decide who monitors and responds to news after hours.
Q: What are the immediate implications for most investors?
A: For most people, not much will change or there’s no need to make major adjustments. If you’re a long-term investor saving for retirement through a diversified retirement portfolio, the basics of investing remain the same. You don’t need to start checking your account in the middle of the night, and you don’t need to react to every overnight market move just because trading is available.
In fact, one of the biggest risks may be the temptation to trade more often simply because the market is open. Successful long-term investing has always been built on patience and discipline, and those principles don’t change with longer trading hours.
If you have questions or are simply curious, it’s worth having a conversation with your investment advisor about how expanded trading hours might affect your account. It makes sense to ask the advisor how the firm will handle overnight orders, what costs and risks apply, and whether the long-term plan stays the same.
For Iowans, the lesson from our agricultural markets is worth remembering: a market can be open without being equally deep at every hour. And as Wall Street prepares to stay awake longer, that distinction may matter more than ever.
