Overnight Frenzy: The Volatile World of Non-Stop Stock Trading
The booming overnight stock trading phenomenon raises alarm bells among Wall Street experts, highlighting the potential risks to market stability and individual investors.
The Facts:
The recent boom in overnight stock trading has raised significant concerns among Wall Street professionals. The amateur-investing revolution sparked by the pandemic has fueled a surge in 24/7 trading of U.S. equities, with platforms like Robinhood and Interactive Brokers offering investors the ability to buy and sell stocks around the clock, effectively eliminating the traditional 8-hour overnight break in the stock market.
This shift has been driven by growing demand from younger retail investors and international traders who want to react to market-moving events as they happen, rather than waiting for the market to open. In fact, overnight trading now accounts for up to 25% of Robinhood's total trading volumes, with a 10% jump during the recent meme-stock frenzy.
Even though access to financial education has increased for younger cohorts compared to previous generations, with Gen-Z 60% more likely to have financial instruction in school than millennials and 150% more likely than Gen Xers. Additionally, technology has made it easier for young people to access financial markets with less money, leading to increased stock market participation among under-25s (40% in 2022 compared to 16% in 1995). However, much of this growth is driven by speculation, with more than half of young investors owning some form of cryptocurrency, making it the most popular asset in Gen Z portfolios. Factors driving this include easy access to trading platforms, FOMO (fear of missing out), and the experience of seeing peers get rich from crypto and meme stocks. When the market turns volatile, Gen Zers with their under-diversified and crypto-heavy portfolios are especially vulnerable to significant losses.
Industry veterans like Joseph Saluzzi, co-head of equity trading at Themis Trading LLC, are worried about the potential risks of this 24/7 market. Saluzzi fears that the relative illiquidity and lack of price discovery during overnight trading could allow bad actors to manipulate stock prices for quick profits. He cites examples of sudden 20% surges in GameStop shares on a Sunday evening as evidence of these concerns.
Other industry experts share similar worries, highlighting the potential for increased volatility, wider bid-ask spreads, and the disproportionate impact on smaller, less liquid stocks. The CEO of Blue Ocean Technologies, which operates a dedicated overnight trading platform, acknowledges that over 70% of the volume on their platform is in illiquid names, compared to just 16.6% at major alternative trading venues during regular hours. Practical challenges like clearing trades on weekends are a key reason not every firm is rushing to extend trading hours.
Overnight trading could also create mental hazards for investors who feel pressured to constantly monitor the markets, as they may now have to do to react to developments as they happen. Overseas markets are wary of this trend as it could further increase the allure of US equities compared to local markets. Regulators are also closely monitoring the situation, with the SEC reviewing applications for 24-hour stock exchanges and emphasizing the need for adequate safeguards against fraud and manipulation. The New York Stock Exchange, which sparked the debate by polling industry participants about non-stop trading, has yet to publish its findings and has stressed the need for extensive preparations to ensure the market is ready.
The View:
The rapid growth of overnight stock trading is a concerning development that poses significant risks to the stability and integrity of the U.S. financial markets. While the convenience and accessibility of 24/7 trading may appeal to some retail investors, the potential for manipulation, volatility, and disproportionate impact on smaller, less liquid stocks outweighs the perceived benefits.
The current state of financial education, particularly among younger investors, is failing to adequately prepare the next generation for responsible and informed participation in the markets. The CFA Institute's survey findings, which show that Gen Z investors are heavily invested in exotic assets like cryptocurrencies and individual stocks, rather than diversified index funds, are a cause for concern. While it is positive that more young people are participating in the markets, much of this growth is driven by speculation rather than solid investment strategies. The lure of day-trading apps, social media investment advice, and the recent success of meme stocks and cryptocurrencies have created a generation of speculators, rather than long-term investors. The market downturn could be especially harmful for under-diversified, crypto-heavy Gen Z portfolios, and relying on market downturns to teach investment lessons is not an ideal approach. While some level of speculation is acceptable, it should not be the primary investment strategy for most individuals.
Education is still crucial, but it needs to be improved and made more effective in the face of easily accessible, but often bad, online investment advice.
Regulators and market operators must work together to ensure that the expansion of overnight trading is implemented in a responsible manner, with robust safeguards against manipulation and volatility. Failure to do so could have far-reaching consequences for the stability and reputation of the U.S. financial markets, as well as the financial well-being of individual investors.
TLDR:
Surge in 24/7 trading of U.S. equities driven by younger retail investors and international traders.
Overnight trading now accounts for up to 25% of Robinhood's total trading volumes.
Increased financial access for Gen Z, but much of the growth is driven by speculation.
Over 50% of young investors own cryptocurrencies, making them vulnerable to market volatility.
Concerns about potential manipulation, wider bid-ask spreads, and disproportionate impact on smaller, less liquid stocks.
Practical challenges like clearing trades on weekends limiting some firms from extending trading hours.
Potential mental hazards for investors pressured to constantly monitor the markets.
Regulators closely monitoring the situation, emphasizing the need for adequate safeguards.
Experts suggest limiting trading hours could lead to improved investment performance and a more disciplined, long-term approach.
Importance of effective financial education to address the rise of online investment advice and speculative trading strategies.
Know More:
Momentum is Building for 24-Hour Stock Trading
Should The Stock Market Stay Open 24/7?
Insights From:
24-Hour Stock Trading Spooks Wall Street Over Always Open Markets - Bloomberg