Have you seen the new Lionel Richie TDAmeritrade commercial, where two guys are trying to get the singer to say “All night long”, as in now with TD you can trade stocks outside of the typical 9:30am EST to 4:00pm time frame? This offering was attempted several years back by another brokerage firm, but it didn’t catch on. Will it work this time?
Not that any of you reading this are itching to buy Apple or short Tesla while watching Late Night, but it is an opportunity to build on my last couple of blogs where we discussed liquidity and some of the interesting dynamics surrounding it.
In 1995 Futures (currency market) began trading almost 24/7. They start at 3pm pacific time on Sunday and don’t stop until Friday afternoon at 1:15pm pacific time. Basically, only closed on Saturday. And of course, Cryptocurrencies trade every waking hour of every day (I know lots of people who are buying Bitcoin, etc. not only during Late Night, but Late, Late Night). But, before we jump to that, let’s cover why trading stocks this way hasn’t gained traction yet.
Buyers and sellers of stocks are always looking for the best prices, and the more players, the more activity, the greater the competition for fulfillment. But after hours, the bid-ask spread is so wide you can drive a truck through it. A frequent comment when this was first attempted a few years back was ‘Convenience is great, but I’d rather have a better price’.
Earnings announcements are a big deal. Not only do the financial news channels build their daily schedule around these flags, but corporations strategically announce either pre or post market. Traders and investors often link their strategy to these releases, trying to gauge market reaction (or over reaction). And if we’ve learned anything over the past several years, playing the volatility of a stock has become the norm. Nothing serves volatility more than time parameters, which force people to act within certain boundaries.
Sometimes if the earnings announcement is particularly bad, having a little breather, when no one can take action, can massage emotions. This works on the macro as well. In fact, regulatory agencies make everyone aware that some of their fail-safes (circuit-breakers designed to protect against a “flash crash”) aren’t available outside of traditional trading hours.
Given these issues, I believe TDAmeritrade’s recent offering has a good chance of forcing others to follow. One of our managers is good friends with the firm that is managing this for TD and right now it’s one person, at a desk, trading a limited number of popular stocks. If interest picks up, they’ll expand the list of tradable companies and eventually bring in more people to work the night shift.
The big difference between today and when this was first tried isn’t that the Futures markets (Forex) has operated near around the clock for nearly 2 decades. After all, the people who trade is this market aren’t exactly widespread. In fact, I doubt you even know someone who is active in futures, because the currency market is technically a bunch of the world’s biggest banks and brokerage firms trading with themselves. So, the only “exchange” you’ll find takes place in cyberspace as they’re trading. These big-time traders produce so much volume that it has become the world’s biggest market (3x larger than the bond market and 7x bigger than the stock market).
So, speaking of cyberspace, that actually points to why I believe 24/7 (or at least 24/5) will catch on this time around – Cryptocurrencies. I bet you know lots of people who own Bitcoin, maybe even you own some yourself. If you track the crypto’s on a site like this https://coinmarketcap.com/, you can watch the price change by the minute…all 1440 of them (minutes that is).
The dominant demographic that owns crypto’s are very tech savvy, used to instant gratification and insist on transparency. These characteristics will help drive demand for access to stocks beyond 9:30am to 4:00pm.
I start my day between 5:00 and 5:30, which means I’m winding down by 9:00. There’s an entire generation that is just cranking up when I’m viewing the back of my eyelids. Between that and a truly flat, seamlessly linked network of global economies, 24-hour trading is coming. But, what does it mean to you?
Not much, really. However, it will mean a tremendous amount to money managers. If you remember in my last couple blogs I highlighted the liquidity change in our markets over the past decade. There are trillions more dollars held in very liquid mechanisms called Exchange Traded Funds (ETF). Here’s the link to the last blog:
Liquidity is good. Managers will have to change how they invest according to these new dynamics. For instance, if your algorithm is oriented to rebalance at market close…but the market doesn’t close, you’ll have to build in a different calculation. More importantly, there won’t be any ‘breathers’, when during a particular time of tumult, you can rein in the collective brains and assess the best course of action. Liquidity will come under more stress, because a lack of boundaries may cause disproportionately.
It’s coming. Thanks Lionel…