‘Beyond the closing bell’, ‘after-hours’ and/or ‘extended hours’ trading capabilities have been highlighted by digital retail brokerage firms as key levers to enable individual investors globally to continue interacting with the market, react to late-breaking news (such as corporate earnings or economic indicator releases), and capitalize on price shifts.

While demand for extended stock trading hours has primarily been driven by retail investors, the launch of extended hours trading may push institutional players (including hedge funds and mutual funds) to step up their participation in order to respond to overnight price movements. 

A couple of headlines developments in the US highlight an acceleration in this march towards extended trading hours:

• On October 25, 2024, NYSE ARCA submitted a proposal to the SEC to extend after-hours ETF trading, with the goal to open trading activity from 1.30am to 11.30pm ET on weekdays (currently 4am to 8pm ET). One of the goals is to get closer to global cryptocurrency markets availability (trading 24/7), with NYSE ARCA targeting 22/5. Also worth noting is the NYSE’s arrangement with the DTCC to clear all trades in extended hours, enhancing stability and transparency during these hours.
• On November 28, 2024, the SEC approved the 24X National exchange startup, the first US stock exchange that would operate 23/5 (with a daily break between 7pm and 8pm ET, and trading from Sunday evening to Friday evening) for listed National Market System (NMS) stocks.

While intriguing and potentially promising, such extended windows into non-standard hours for trading can give rise to challenges, complexities and risks that differ significantly from daytime trading capabilities (typically conducted from 9.30am to 4pm ET).

Impact on Institutional Investors

Institutional investors would need to consider:

Increased flexibility. Global investors, especially those in different time zones, will have more opportunities to trade US equities (24X) and ETFs (NYSE ARCA).
Market dynamics. The extended hours could enhance price discovery (e.g. for next day opening prices), particularly around major announcements or economic data releases that occur outside standard trading hours.

Liquidity and volatility. While extended hours can increase overall market liquidity, they often mean higher volatility and wider bid-ask spreads due to lower trading volumes during off-peak times (‘thin trading’). To note: NYSE ARCA’s proposal could consolidate liquidity under a single, regulated venue, reducing the impacts of various other Electronic Communication Networks (ECNs) that currently serve to fragment liquidity.

Operational adjustments. Institutional investors might need to adapt their strategies and operations, such as staffing (with location strategy optimization) and monitoring, to take advantage of the extended trading window.

Technology and costs. Investors may need advanced trading tools to navigate the extended hours effectively, which could increase costs for those without industry leading capabilities and resources.

Impact on Broker-Dealers

From their perspective, broker-dealers should review the impacts on:

Operations and technology adjustments. Broker-dealers will need to adjust their operations to accommodate the extended trading hours. This could involve hiring additional staff or implementing automated systems to monitor and process trades around the clock.

• Staffing: Broker-dealers will need to implement multiple shifts or hire additional staff to ensure continuous coverage. This might include night shifts to handle trading activities during extended hours, including client services and support.
• Technology upgrades: Enhanced trading systems and infrastructure will be necessary to support the added trading activity, the connectivity needs and ensure reliability during extended hours. This includes upgrading servers, improving network capabilities, and implementing robust cybersecurity measures.
• Training and education: Staff will need training to handle the new operational demands, and clients may require education on the implications of extended trading hours, including potential risks and opportunities.

Risk management. With the move towards 22/5 or 23/5 equity trading, broker-dealers will need to enhance their risk management strategies to handle the increased volatility and potential for rapid market movements during low-liquidity periods.

• Order execution risk: Low trading volumes in extended hours can result in partial fills or unfavorable pricing, though they could be mitigated with limit order preference, which provides more price control.
• Informed trading risk: Low participation in extended hours increases the risks associated with trading against well-informed traders, resulting in potential higher transaction costs.
• Increased volatility: Extended trading hours often come with higher volatility, as trading volumes are lower during off-peak times. Broker-dealers will need to enhance their risk management systems and personnel to monitor and respond to rapid price movements outside of traditional business hours.
• Real-time risk monitoring: With trading occurring almost continuously, broker-dealers will need to expand the existing risk monitoring systems. This includes automated alerts and controls to manage potential risks as they arise.
• Liquidity management: Managing liquidity will be more challenging during extended hours due to lower trading volumes. Broker-dealers will need to ensure they have sufficient liquidity (cost of funding and inventory availability) to meet trading demands and avoid significant price impacts (wider spreads and price instability overall).
• Market surveillance: Enhanced market surveillance will be necessary to detect and prevent market manipulation and other illicit activities during extended hours, with low liquidity / high volatility. This includes using advanced analytics and machine learning tools to identify unusual trading patterns.
• Operational resilience: Broker-dealers will need to ensure their systems and processes are resilient to handle the increased operational demands. They will also be required to have robust backup systems and disaster recovery plans in place. Organizations should also accelerate their incident recovery timelines to minimize business impacts, given the reduced market close window.

Regulatory Compliance. Broker-dealers will need to ensure they remain compliant with regulatory requirements, which may evolve to address the challenges and risks associated with nearly continuous trading.

• Continuous monitoring and reporting: Broker-dealers will need to ensure continuous monitoring and reporting of trading activities. This includes adhering to real-time reporting requirements and maintaining transparency in all transactions, even during off-peak hours.
• Enhanced surveillance: Regulators may require enhanced surveillance measures to detect and prevent market manipulation and other illicit activities during extended hours. Broker-dealers will need to invest in advanced surveillance technologies and processes to meet these requirements.
• Adherence to market and regulatory rules: Extended trading hours mean broker-dealers must comply with market rules and regulations around the clock. This includes ensuring that all trades meet regulatory standards and that there are no violations of trading practices. As regulatory bodies adapt to the new trading environment, broker-dealers will need to stay informed about regulatory updates and ensure timely implementation of any new compliance requirements.
• Compliance staffing: To manage the increased regulatory demands, broker-dealers may need to expand their compliance teams. This includes hiring additional compliance officers and providing training to ensure they are equipped to handle the complexities of nearly continuous trading.

Increased Costs: Based on all of the above, the need for continuous operations may lead to higher operational costs, including staffing, technology upgrades and infrastructure maintenance to ensure seamless trading during extended hours.

• Staffing costs: To cover the extended trading hours, broker-dealers may need to hire additional staff or implement multiple shifts, which will increase payroll expenses.
• Technology and infrastructure: Upgrading trading systems and infrastructure to handle continuous trading will require significant investment. This includes enhancing servers, network capabilities, and cybersecurity measures to ensure reliable and secure operations.
• Risk management and compliance: Broker-dealers will need to invest in advanced compliance and risk management systems to monitor extended trading activities, including real-time surveillance tools and automated risk controls.
  
  

Conclusion

On balance, the expansion of extended hours trading capabilities is a forward-looking evolution, promising greater flexibility and accessibility for domestic and global participants in the US equity market. However, it does present risks as well as opportunities for investors, as well as for broker-dealers, who need to weigh the pros and cons of this shift in the context of their trading strategies. 

At Capco, we help buy-side and sell-side firms embrace the opportunity of extended trading hours. We transform organizations based on our capital markets expertise and can help financial institutions address the impacts and challenges related to this initiative. Please contact us the via the form below to explore how your company can assess and adapt to the increase of extended hours trading windows.