I am curious why a lot of market hours are something like 9 to 3 or 9 to 4 pm when there is such demand and so many prop shops and more out there. I know certain markets are continuous trading but a lot of very large famous ones seem to stick to this incredibly short schedule. Why would they do that?
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I think there is a straightforward answer to this: The associated costs of changing trading hours need to be justified by the benefits. Exchanges, regulators, and large market participants such as banks, hedge funds, buy side long-only funds very closely communicate and weigh pros and cons when considering changes to trading hours. Obviously motivations at times between those participants are opposing. Exchanges argue they may transact more volume through longer trading hours (which is actually not proven). Some investors believe that continuous trading hours in some assets benefit price discovery and that they smooth out liquidity spikes throughout the day. Other market participants believe that its better to transact only for a few hours when everyone trades and thus liquidity is much more concentrated. There are in fact exchanges that are only open for 30 minutes or 1 hour for precisely that reason, even though some of such assets have very high turn over. This is as far as motivations and participants in such discussions goes. But the key aspect is cost-benefit when considering a change in trading hours. The cost are very high by having to adjust algorithms, trading applications, back office systems, data streams, and such forth. It is not an easy process and such changes are sometimes announced months if not a year ahead. In some cases such as liquid index futures pressure to expand trading hours are mainly motivated by competition. Nikkei futures trade a lot longer now compared to a short while ago mainly because of Japan's drive to not lose sight of remaining one of the most advanced exchanges (plus often what comes out of the US and proves itself is imitated in Japan). Imagine if you could trade the same Nikkei contract in Singapore round the clock but not in Osaka. What if price and liquidity patterns would not disfavor Singapore? Would anyone want to trade in Osaka? I doubt it. But my assumption of similar price or liquidity patterns when expanding trading hours is what it is, an assumption. Volume and liquidity profiles change drastically when changing trading hours. I remember that all the banks had to completely re-write/update their VWAP algorithms when trading hours in HK were adjusted. Keep in mind that especially in the financial community one mantra goes: "If it ain't broke don't fix it". The fear of changes in liquidity, price discovery often scare portfolio managers and traders more than keeping things as they are. Finally do not forget, lunch breaks are a great way to stretch your legs, get out of your lazy Herman Miller, catch up on the latest gossip and get back to the office. Some do not appreciate this being taken away from them at least not if they can voice their opinion and can hold on to it :-) |
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