[THE VIEW]Who Benefits from the Market That Never Sleeps?

Overnight Trading Driven by Asian and Individual Investors
The "Market That Never Sleeps" Fueled by AI and Tokenization

In 2024, the U.S. Securities and Exchange Commission (SEC) approved the nationwide securities exchange registration of 24X, an exchange that allows trading for 23 out of 24 hours on weekdays, and the exchange is set to officially launch its operations at the end of this month. Initially, trading will be available from 4 a.m. to 8 p.m., but the plan is to gradually expand trading hours so that, except for a daily maintenance period, trading will be possible for 23 hours a day from Sunday 8 p.m. to Friday 8 p.m., in order to meet the growing demand for over-the-counter trading.

In addition, the New York Stock Exchange (NYSE) and Nasdaq have also announced plans to expand stock trading hours to 24 hours a day, signaling a paradigm shift in the market. With advancements in technology such as artificial intelligence (AI) and tokenization, the "market that never sleeps" is becoming a reality. While the expansion of trading opportunities is a positive development, there are concerns that it could also expose investors to new risks.

Currently, after-hours trading accounts for about 11% of total U.S. stock market trading volume, with most of this activity concentrated just before the market opens and right after it closes. In particular, overnight trading, which takes place from 8 p.m. to 4 a.m. Eastern Time, accounts for only 0.2% of total trading volume, indicating its small share. A closer look at the characteristics of trading during these hours reveals significant issues.

According to several studies, overnight trading is primarily driven by individual investors. One study found that 80% of overnight trading volume originates from the Asia-Pacific region, with about half of that coming from Korean investors. The remaining 20% is attributed to U.S. individual investors. This suggests that, rather than institutional investors, individuals are participating in overnight trading due to news events that occur during these hours or because of time zone differences.

The problem is that market quality deteriorates significantly during these hours. Without exchange-provided quotes at night, bid-ask spreads widen considerably compared to regular hours. For stocks traded every night, the spread was about 40% higher, and for all overnight-traded stocks, it surged up to 144%. This means investors have to pay much higher costs when buying or selling stocks. In fact, the actual trading costs for individual investors were found to be three times higher than during regular hours.

A 24-hour open market signifies both an expansion of opportunities and an increase in risks. The "market that never sleeps" can be an opportunity for some and a risk for many. Image generated by ChatGPT

An even bigger issue is the lack of investor protection mechanisms. During regular market hours, investors are protected by the best execution obligation, which ensures they trade at the most favorable price. However, these regulations do not apply during overnight trading. In addition, investor protection mechanisms such as circuit breakers, which help mitigate overall market volatility, are also not in effect. As a result, investors may end up trading at unfavorable prices. One study found that 92% of overnight trades were executed at the best or worse price, with almost no price improvement effect.

Some securities firms have tried to protect individual investors by automatically converting market orders into limit orders within a certain range when market prices fluctuate sharply. However, there are analyses suggesting that institutional investors using sophisticated algorithms have exploited this system to maximize their profits. This demonstrates that, in the absence of regulatory oversight, individual investors are highly likely to incur losses due to information and system asymmetries.

A study analyzing the European market pointed out that longer trading hours, compared to the U.S., actually dispersed liquidity, undermined market quality, and increased trading costs. This suggests that simply extending trading hours is not a panacea.

Twenty-four-hour trading may become an unstoppable trend. However, what matters is not speed but direction. If institutional safeguards for investor protection fail to keep pace with technological advancements, the "market that never sleeps" may offer opportunities to a few savvy investors, but it could turn into a dangerous jungle for the majority of individual investors. Encouraging competitive quoting, strengthening market surveillance, and establishing a regulatory framework that ensures fair protection for all investors regardless of the time of day are essential prerequisites for the successful adoption of 24-hour trading.

Park Sungkyu, Professor at Willamette University, United States