FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.
Technological advancements, changing regulations, and the increased accessibility of financial markets have made it possible for individual traders to access trading platforms 24/7, leading to an explosion in after-hours and overnight trading.
The democratization of trading platforms through technology has played a key role in making overnight trading more accessible. Online brokerages and mobile trading apps like Robinhood, Firstrade, E*TRADE and Webull have made it possible for retail traders to trade anytime, anywhere, even in off-market hours.
These platforms offer features such as real-time data feeds, algorithmic trading, and fractional shares, which empower individuals to participate in markets that were once reserved for institutional investors.
Anthony Denier, Group President and US CEO of Webull, confirmed that demand for overnight trading is rising among retail investors, as markets have become more globalized and trading platforms offer greater accessibility and investment opportunities.
The demand is fueled by retail investors wanting to capitalize on market movements outside of traditional trading hours, such as those driven by geopolitical events, earnings reports, or breaking news, he said.
“The flexibility that overnight trading provides is also appealing to retail investors who might have limited availability during traditional trading hours to actively manage their portfolios,” he added.
Arguably, the greatest beneficiaries of overnight trading will be retail investors – people who, in the past, may have found the process mysterious or intimidating, Stephen Callahan, Trading Behavior Specialist at Firstrade, told Traders Magazine.
“They may have thought that only large institutional investors were able to take advantage of increased volatility or off hours news,” he said.
“Over night trading will show the “little guy” that the markets are more fair, and less prone to manipulation,” he added.
“Although overnight trading is not new, the recent spike in interest is an extension of life in the twenty-first century,” Callahan said.
News cycles are 24/7, sports viewing ( and betting) are no longer solely local, it makes sense that Stock and ETF trading should be offered in extended hours, he said.
“Most people have access to market research and stats at their finger tips. Why not take advantage of an event that can move the market in real-time, instead of waiting for the following morning’s open,” he added.
According to Callahan, there is no particular demographic responsible for the surge of overnight trading, but at Firstrade we have seen more new accounts opened, and more speculative trading from people under the age of forty. We actively track clients requests and suggestions via phone and e mail, so we’re pleased to offer a service that customers want.
Meanwhile, according to Benjamin Schiffrin, Director of Securities Policy for Better Markets, it’s not clear that there is growing demand for overnight trading.
“There seems to be a desire to extend trading hours on the part of the exchanges, but that is not the same thing as investors being unable to trade during normal trading hours and seeking to have trading sessions extend around-the-clock as a result,” he commented.
To the extent there is growing demand for overnight trading on the part of investors, it seems to be coming from traders in Asia, he said.
“It is entirely unclear that there is a growing demand for overnight trading from retail investors in the United States. Instead, the push seems to be driven by the exchanges,” he argued.
Risks
Lower liquidity is one risk of overnight trading, as there is less buying and selling activity during extended hours, Denier said.
“This can potentially lead to wider bid-ask spreads and price fluctuations,” he told Traders Magazine.
He said that overnight trading provides opportunities for global investing strategies and enhanced market efficiency.
“However, it is essential that retail investors have access to the necessary tools and information to hedge against risks, as institutional investors do,” he stressed.
In order to manage against the risks associated with thin liquidity, retail investors can submit LIMIT orders for whole-share amounts, specifying the price and duration at which a trader’s order will be executed, Denier argued.
Schiffrin also said that one risk of overnight trading is a lack of liquidity, adding that there just would not be the same volume during overnight trading.
“So retail investors taking part in extended sessions would be trading in a market where prices are bound to be more volatile and less favorable than during normal trading hours,” he said.
“This would provide another avenue for sophisticated market participants such as high-frequency traders to take advantage of retail investors,” he commented.
Another risk of overnight trading, according to Schiffrin, is the fact that it is human nature to engage in riskier behaviors at night.
“As we’ve seen with legalized sports betting, the combination of technology fueled by artificial intelligence that entices fans to place bets and the ability to place bets 24 hours a day has led to a gambling addiction crisis,” he noted.
“It is easy to envision the financial industry using the same combination of inducements to trade and the ability to trade at any time to get retail investors hooked on trading, with potentially disastrous consequences,” Schiffrin said.
“There is also the risk of allowing trading at a time when regulators will literally be asleep at the switch,” he added.
Fewer market makers, less volume can mean wider spreads and volatile moves in the market, according to Callahan.
“We also feel that the more participants, the better. Informed, knowledgeable traders will bring greater transparency and add liquidity to overnight trading. When there’s additional focus on trading off hours, we’ll also have more confident traders. Overall a net positive, despite any additional risks,” he said.
Meanwhile, according to Schiffrin, our securities markets are already extremely fragmented.
“The consequence, and too often the goal, of this complexity and fragmentation has been the transformation of our financial markets from a wealth creation system for the many into a wealth extraction system for the few,” he argued.
According to Schiffrin, market fragmentation has created opportunities for predatory market participants, such as high-frequency trading firms, to take advantage of retail investors.
He believes that overnight trading would only exacerbate the problems that already exist in light of our fragmented securities markets and introduce new risks for retail investors.
“Liquidity will further deteriorate with the advent of overnight trading, and predatory market participants will have a new avenue for extracting wealth from retail investors,” he said.
“Retail investors would have the ability to make a trade in the middle of the night with just the click of a button but likely without a real understanding of the potential disadvantages of trading overnight,” he added.
“Retail investors would be trading at a time when the bid-ask spread is likely to be greater than it would be during normal trading hours, so they would not get the best prices,” Schiffrin said.
Going forward
The question retail investors need to ask is whether overnight trading is good for them: “It may be good for the platforms that can make money through overnight trading,” Schiffrin said.
Nevertheless, according to Denier, as brokerage platforms become more advanced, retail investors are expecting increased accessibility to offerings that are traditionally only available to institutional investors.
“Extended hours trading accessibility helps unlock investment opportunities, but will also increase the need for sophisticated tools, offerings, and education to help retail investors hedge against risk and better manage their portfolios,” he noted.
Callahan added: “Going forward we believe the retail community will, in time, incorporate over night trading into their investment strategy.”
The rapid improvements in technology and the wealth of information will make this style of trading the new normal, he said.
“Stocks that trade off of momentum rather than technical or fundamental analysis are even more subject to timing. And, there’s no time like the present, even if that happens to be in the middle of the night,” he said.
