Like Night and Day Some in the industry are talking about making stocks trade 24 hours a day, like stock futures and currencies. But for now, stock markets are typically only open for a fraction of the day. That’s good for traders, as it lets them focus on prices and liquidity for a small part of the day and lets them sleep soundly on completed trades or hedged positions. However, just because the market is closed doesn’t mean valuations don’t change. Today, we look at returns from holding stocks intraday compared to overnight. The difference is (quite literally) like night and day! Most trading happens during the day When we look at trading activity in the market, we see that almost all trading, over 95%, happens during the market's official “open” hours. Although after-hours trading is allowed, there is very little trading of stocks overnight. And the majority of what does trade after hours occurs in the hour before and after the market is officially open, which is also when some U.S. economic data and most earnings are released. In fact, a lot of the trading that happens after 8 p.m. when the SIP stops reporting is reported to the SIP at 4 a.m. However, in total, that adds to less than 0.2% of the typical ADV. Chart 1: Most trading happens intraday Given this – and the economic theory suggests that prices move because of supply and demand – you might expect prices to move much more in the day than at night. However, that’s not true. Day volumes dominate, but night returns are higher! Interestingly, if we model the performance of a day-hold and a night-hold strategy for the S&P 500, we see that overnight returns have been significantly higher than day returns. That’s despite most of the trading happening during the day. In fact, over the more than 30 years in this chart: Intraday returns are barely positive (+12%). The buy-and-hold strategy has increased almost 20-fold. Overnight returns, therefore, have also increased close to 20-fold. To some, this difference in returns may seem unexpected, given that trading happens during the day. However, there are some very obvious explanations as to why this happens. Chart 2: Historic returns of day and night hold strategies, with and without trading fees In the chart, we compare: Buy-and-hold strategy (green line), which represents the total return of holding SPY, the oldest ETF in the U.S. Day strategy (orange line), which represents buying the market open and then selling the market close, holding uninvested cash overnight. Night strategy (blue line), which represents buying the market close and then selling the market open, holding uninvested cash during the day. Note that the sum of the day and night strategies equals the buy-and-hold return. Don’t try this at home! Although this overnight-only strategy might look attractive, we would remind investors that trading is often harder than it looks. For a start, a strategy as active as this, where you buy and sell your whole portfolio each day, would likely have high annual trading costs. In the dashed line above, we add trading costs of just 1 cent per trade (Chart 2). Remembering that SPY is currently almost $500, that adds to less than ½ basis point (or 0.004%) per day (both trades). The dashed line shows that even these small trading costs almost totally eliminate the historic gains of the overnight strategy. If a lot of people did this trade, costs could easily be higher – especially after paying commissions and SEC fees. Since 2001, this hasn’t worked consistently It’s also important to understand the power of compounding. Starting this strategy back in 1992, when SPY was first launched, seems to bias the results. During the formation of the tech bubble, the overnight strategy consistently outperformed, adding to what may have turned out to be an unassailable lead. If we instead look at rolling 12-month returns, we see that investors joining this strategy after 2001 would have far less predictable results. In fact, on this basis, the day strategy leads 30% of the time (orange bars in chart 3). Interestingly, that’s consistent with two ETFs that were assigned to this theme. Both were closed recently after failing to gain assets, but they also significantly underperformed in the year before they closed. Chart 3: Rolling 12-month difference in returns shows outperformance is not consistent It’s the economy, stupid? The data in Chart 3 also shows that many of the longer periods of “day” outperformance seem to align with some important macro events (shaded areas). That makes some sense. Bad macro news from foreign markets would make all stocks fall overnight. Often, U.S. rescue packages are announced during the U.S. day, boosting that day's returns. Covid is an interesting case study. A period of mostly bad news for stocks, with some significant updates and shocks coming out of Europe and Asia – during their trading hours – that made U.S. stocks fall after hours. Still, the largest stimulus and rescue plans came from in the U.S. and were mostly announced during U.S. day. In short, news affects stock valuations – and in an efficient market, it should be priced into stock returns when it happens, not hours later. There is a lot of stock news after hours too It’s not just macro news that matters. As we recently showed, company earnings and other material disclosures are also, overwhelmingly, released after hours. That data also suggested that company earnings are, on balance, positive for stocks, too, which would contribute more to positive returns after hours. In fact, a lot of the trading we see after-hours occurs in earnings stocks on the day they report. Chart 4: Earnings are all outside of market hours Sometimes, there is a logical explanation for something unexpected With so much price movement in the quiet of the night, it might be easy to think that something spurious is going on. However, with an understanding of how stock valuations work and when important news happens, we see that sometimes prices can move without significant supply and demand and trading. It reminds us of another study we did where we found that some ETFs can tick actively all day, adjusting their prices to new news without ever trading (not even to arbitrage a mispricing). Although the proportion of stock returns coming after hours is disproportional to the level of trading, this shows it can all be explained by something as fundamental as news leading to updates in stock valuations. Looks like the market is efficient after all! From NASDAQ Marketwatch
All major stock and options markets should be open 23h/5d/week as there is demand for this, also simply b/c of the many time zones on the globe... 23 hours b/c the remaining 1h can be used for maintenance and restarting of the exchange and brokerage computers etc.
The subtitle of Chart 1 says "The green bar represents the trading volume at the closing cross". Either I'm color blind or there is no green bar at all on the said chart.
I'm a fervent proponent of 23/24h trading, 7 days a week. Today wall street favors trading on US Eastern standard time within a relatively short window, forcing the rest of world to adjust their trading accordingly. For those of us living outside the states, it's a significant burden to work odd hours that affects everything else in our lives. I think there would be a massive surge in US trading if everyone could trade at their convenient times (isn't crypto traded 24h/365d ?). Anyway, my 2 cents.
Look at the big Dax Futures from Eurex. It used to open during the European session. A few years ago, it opened early during the Asian session. And the volume during the Asian session is ..... close to zero. Hang Seng futures used to close very early during the US session. Its closing hour has been extended by a few hours. The volume traded during the extended hour is decent. Only certain products are suitable for ~24 hrs/day trading.
The real question is why aren't options traded in the after hours? Is it because it requires non-automated market makers?
%% MAYBE not color blind, no harm in skipping that chart anyway; see chart #2/ I see green line, total return. and top blue line on that chart............. Skip the dashed blue line on that chart #2chart also.LOL
I have talking about 24 hr trading for nearly 2 decades now. There is absolutely no reason why markets should be closed more than they are open. A 6.5 trading was perfect in 1948 but in 2024 its not. They need to completely eliminate pre market and after market trading and open markets 24 hrs a day. People keep saying there is no demand. Who cares.... the demand will be there when it's there and traders will have access to trade when they want to instead of a fraction of a day with a window span of a pathetic 6.5 hrs. We are now global and everything is electronic so let the 247 trading begin. Robin hood has it and I will say I have used it to my advantage while overnight futures have moved the spy 2... 3 ...4 dollars a share. Money doesn't sleep and wallstreet shouldn't either. Time for 24/7 trading NOW!
Some of the agriculture futures open for no more than 7 hours a day. And there is no plan to extend the trading hours. eg palm oil, rubber ....