A report from the industry trade association, the World Federation of Exchange (WEF), released this month, has looked at the policy and market impacts of extended trading. Conclusions include that a successful implementation will require coordination across the entire financial ecosystem, and while an evolution to 24/7 markets is technical feasible, extending trading hours may not be desirable, beneficial or inevitable in all.

The paper examined practical challenges that market infrastructures, market participants and regulators must address including market considerations, operational and technological consideration, and post-trade considerations. It suggested future discussions should be focused on “how to achieve [extending trading] in a manner that protects investors, strengthens market integrity and enhances global competitiveness.

To examine market considerations on things like liquidity and price formation, WFE looked to existing assets that trade through the day such as currencies, bitcoin and gold and oil futures (see figures below).

The report notes that while these differ from equities, lessons can be learned. For example, those markets experience peaks and troughs in trading with most of trading done in small windows. WFE expects this pattern to be repeated when applied to equities markets. It also suggested that the entry of wholesalers, single-dealer platforms and systematic internalisers may draw liquidity away from exchanges and alternative trading systems (ATS). This could stabilise spreads but fragment liquidity – which can be thin in extended hours.

In a positive finding for its members, the report says extension of trading hours by regulated equities exchanges may have a positive impact on on-exchange traded volumes, by reclaiming order flow form ATS and internalised flows. If exchanges reabsorb activity in this way, the report states, then transparency is enhanced, price formation may be strengthened and market integrity improved (as exchange-based trading is subject to more surveillance and regulatory oversight).

On the post trade side, a key area of focus is that of margin and liquidity support during periods when banking and payments systems are offline. It suggests a cost-benefit analysis is essential to determine if a shift to extended clearing hours means efficiency gains outweigh the additional operational and financial costs.

In conclusion, the report notes that the move to less than 24/7 trading, e.g. 22/5 or 23/5 represent a “pragmatic and measured step”. It finds that extended trading is not appropriate in all context, but different models can co-exist.

For further research on this topic, Celent subscribers can read “24-Hour (Trading) Party People: Technology and Operational Impacts of a Move to Overnight Trading”