By Harrison Heaton
Instant reactions to financial news or tweets are probably something every investor wants to be able to have when it comes to the effects they have on their investments. This is exactly the thought process behind Hedge Fund billionaire and current owner of the New York Mets, Steve Cohen. Cohen’s venture capital fund, Point72 Ventures, is working with 24 Exchange, crypto, and foreign exchange trading platform, to try to develop funding for a 24-hour trading stock exchange.
Currently, the U.S stock market opens at 9:30 AM ET and closes at 4:00 PM ET, with extended trading sessions prolonging this window by a couple of hours. A 24-hour trading window would allow continuous trading even in the hours where the volume could potentially be lower like the 3AMs, 4AMS. The pros of this would be the ability for everyday investors and firms to react at the moment financial news comes out based on negative or positive news, and U.S markets being able to cooperate with international markets that open and close at different times. As many investors know the crypto market is open 24 hours a day with volume getting exponentially lower in the early hours with increased susceptibility to fluctuating volatility due to these lower volumes.
Within the last year alone, record numbers of new investors have flooded the market based on the huge success investors have been having. Ever since the Gamestop and AMC endeavor, beginner investors have been coming into the market providing capital and liquidity to riskier companies. The closest thing we have to 24-hour trading is extended market trading, which enhances some type of risk. Liquidity is by far the greatest issue, or should I say lack thereof. In the early hours and super late hours of the day, liquidity is low meaning your ability to buy and sell your shares is not as easy or rapidly matched with an opposing buyer or seller like it is during traditional market hours. Going off this, these investors might not be able to get their order filled for the price they want in extended hours due to the volume being so low and not having as many investors on the other side. What you could have earned during regular trading hours may far exceed extended trading hours. Furthermore, extended trading hours are usually for the more advanced traders, the ones that have more capital information, experience, etc. that could put regular investors on the train tracks.
Now, there is an argument that if market hours are open all day and all night, then the concept of trading will be turned into a speculative endeavor rather than a pool of investments due to the increased volatility. With the markets having a window of trading only during weekdays, it provides a clean, well-structured trading environment that gives every investor equal opportunity and down-to-the-minute interactions. This, therefore, makes volume have less fluctuation throughout the day and consistent volatility pretty much for the span of traditional trading hours. Of course, there will be some times of increased volatility due to volume being lower such as right when the market opens, but for the most part, traders are consistent throughout the day. Yet, when you open up the availability for people to be able to trade at those 3AMs, 4 AM time frames, you provide the exposure for volume to be a fraction of what it usually is and this opens up increased risk. This would give traders and firms a cycle of consistent liquidity and low liquidity in the non-traditional trading hours, motivating business operations to push towards certain hours over others.
However, the instant thought that appeared in my head when I heard about this push to a 24-hour trading period is the concept of collaboration at an untimely moment in the market. With the wallstreetbets shock to the market, we saw collaboration on a whole different level. One that caused huge funds and investment firms to lose multiple millions of dollars and put an unsustainable amount of volatility in the market for certain companies. There would be an inevitable effort for this type of collaboration to occur at for example 3 AM, in which a company would have to adapt operations to ensure liquidity risk does not become a problem while business expectations are down. With companies having to provide periodical dividends to investors, the ability to pay this out promptly may be negatively affected by liquidity issues that arise from prolonged trading hours.
Liquidity is a huge risk that businesses have to take into consideration, and when you elongate the window of trading this risk gets larger and larger resulting in some potential large losses. We can easily compare this new development in the stock market with the crypto market due to these coins, NFTs, etc. all already being traded on a 24-hour window. However, as we all know and can easily see, the crypto market is risky, often fluctuating very heavily, and this in part has to do with the trading hours being open at all times. If we do this to the stock market where more and more people are trading, this could potentially be very harmful due to the level of liquidity risk that will be ever-present.
Work Cited
“Liquidity (or Marketability).” Liquidity (or Marketability) | Investor.gov, https://www.investor.gov/introduction-investing/investing-basics/glossary/liquidity-or-marketability.
About the author: Arielle O'Shea is a NerdWallet authority on retirement and investing. “How after-Hours Trading Works.” NerdWallet, https://www.nerdwallet.com/article/investing/hours-trading-works.
Osipovich, Alexander. “Steven Cohen's Venture Firm Backs 24-Hour Stock-Trading Startup.” The Wall Street Journal, Dow Jones & Company, 1 Dec. 2021, https://www.wsj.com/articles/steven-cohens-venture-firm-backs-24-hour-stock-trading-startup-11638360000.
YunLi626. “Steve Cohen-Backed Start-up Bets on 24-Hour Trading so Investors Can React Instantly to Tweets.” CNBC, CNBC, 5 Dec. 2021, https://www.cnbc.com/2021/12/05/steve-cohen-backed-start-up-bets-on-24-hour-trading-so-investors-can-react-instantly-to-tweets.html.
“Major Risks for Banks.” Corporate Finance Institute, 17 Jan. 2020, https://corporatefinanceinstitute.com/resources/knowledge/finance/major-risks-for-banks/.
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