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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asked Jul 12, 2012 at 20:30
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1$\begingroup$ I think a similar question great discussion is here - money.stackexchange.com/questions/8950/… although not the exact same answer. $\endgroup$– eWizardIIJul 12, 2012 at 22:47
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$\begingroup$ Not sure about that, but for stock markets, companies like to wait until the market closes before they come out with bad news, and in general, some traders also like to wait until the market closes before making certain kinds of deals. It's really more about managing perceptions than anything else because the processes that drive the evolution of market prices always continue uninterrupted whether there is trading or not. $\endgroup$– JL344Jul 12, 2012 at 22:47
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$\begingroup$ "Continuous market" doesn't mean 24/7. It only means that trading can occur at any point in time while the market is open. Ie, it's continuous time vs. discrete time. The opposite would be an auction market. $\endgroup$– chrisaycockJul 13, 2012 at 3:37
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1$\begingroup$ Why did you post this here rather than on money.SE. Should we migrate your question? This may not be the right forum, as the question is not really quantitative. $\endgroup$– Tal FishmanJul 13, 2012 at 13:23
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$\begingroup$ @Tal, I am actually also curious because I am not working as pure quant anymore but more in quant trading space with emphasis on managing risk. Where would such questions go? I checked out personal money and finance SE and it does not look suited for questions about tick data, trading algos, risk management, trading platforms and the like, certainly it does not look like Bloomberg related questions fit with that format. What do you advise? I am asking because I may also pose trading related questions down the road. Thanks $\endgroup$– Matt WolfJul 15, 2012 at 3:26
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1 Answer
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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 :-)
