Looking All Day for Data on 24-Hour Trading

Research indicates that current extended and overnight equity trading, which major exchanges plan to expand towards 24 hours, is characterized by significantly worse market quality and higher costs for predominantly retail participants. Spreads are 40-144% wider and effective costs for retail orders are 3-6 times higher due to the absence of NBBO, OPR, and 605 reporting, allowing for trade-throughs and liquidity provider profit capture. This suggests that implementing near 24-hour trading without robust regulatory frameworks and competitive lit quotes could exacerbate market quality issues and investor costs, posing challenges for future market structure and investor protection.

Analysis

The industry-wide initiative by major exchanges, including Nasdaq and Cboe, to implement 24-hour equity trading faces significant structural headwinds revealed by an analysis of current extended-hours activity. Presently, overnight trading (8 p.m. to 4 a.m.) accounts for a negligible 0.2% of total daily volume and is dominated by retail investors, with 80% of this flow originating from the Asia-Pacific region. Market quality during these hours is materially degraded due to the absence of key regulatory frameworks such as the National Best Bid and Offer (NBBO), the Order Protection Rule (OPR), and 605 reporting. This lack of protection leads to substantially higher costs, with academic research indicating that quoted spreads are 40% to 144% wider, and effective trading costs for retail orders are three to six times higher than during regular market hours. Furthermore, the data suggests sophisticated traders may be systematically exploiting retail order flow, as evidenced by trade executions clustering near automatic price collars. Counterintuitively, some research suggests that longer trading days, as seen in Europe, can dilute liquidity, implying that a simple extension of hours without a corresponding evolution in market structure and investor protection could exacerbate execution risk and harm overall market integrity.

Key Decisions for Investors

• Investors engaging in extended-hours trading must factor in significantly higher transaction costs and wider bid-ask spreads, making the use of limit orders essential to mitigate the risk of poor execution and trade-throughs.
• The proposed shift to 24-hour trading introduces a structural market risk; monitor regulatory developments regarding the potential application of protections like NBBO and the Order Protection Rule to off-hours, as their current absence is the primary driver of degraded market quality.
• For positions in exchange operators like Nasdaq and Cboe, the 24-hour trading initiative should be viewed as a long-term venture with substantial operational hurdles, where failure to address investor protection issues could pose reputational risks.