Financial institutions issue cautions against continuous, around-the-clock stock market transactions
In a recent development, German fund companies and asset managers have expressed skepticism towards the expansion of stock trading to 24 hours. This comes as regulators consider approving the continuous operation of Nasdaq and NYSE from next year.
The main arguments against this proposal center on concerns about increased volatility, reduced liquidity during extended hours, and potential operational risks. These stakeholders often emphasize the importance of concentrated trading hours for market stability, price discovery, and risk management.
One of the key concerns is the potential for increased volatility and market fragmentation. With thinner trading volumes in certain time segments, there could be higher price volatility and less efficient price discovery, making asset valuation and market timing more difficult.
Liquidity and trading costs are another area of concern. German asset managers typically benefit from liquidity concentrated during regulated market hours. Spreading trading over 24 hours risks liquidity dilution, which may increase transaction costs and impair the ability to execute large orders without market impact.
Operational and regulatory burdens are also a significant concern. Running fund operations and compliance systems continuously adds complexity and costs. Risk management measures become harder during off-peak hours, increasing exposure to price gaps and unexpected events.
Investor protection concerns are also raised, as longer trading hours may expose retail investors to riskier trading environments outside of traditional hours when market supervision might be less effective, raising concerns about fairness and protection.
Eric Böss, Global Head of Trading at AllianzGI, finds the argument that longer trading hours increase liquidity unconvincing. Böss warns of the risk that existing liquidity will be stretched over a longer period, which carries significant risks. He also highlights potential extreme price fluctuations in phases with few active traders, such as the early hours of Asian trading, and thin liquidity in the order books as concerns.
These concerns are not unique to the German market. They are standard among European institutional investors when debating the expansion of trading hours beyond usual exchange opening times.
Despite these concerns, the latest discussion on 24-hour stock trading was initiated by corresponding initiatives from major US exchange operators. The Deutsche Börse, however, remains cautious about 24/7 trading, generally following the needs of market participants.
Michael Barsuhn, Head of Trading at Flossbach von Storch, is also against the extension of trading hours. He fears that extending trading hours may lead to a decrease in market liquidity, which could further exacerbate volatility and increase risks for investors.
The interviewed market participants are uncertain about the potential benefits of extending stock trading hours to 24 hours, with many expressing concerns about potential market turbulence due to the extension of trading hours.
References: [1] Article on European institutional investors' concerns about expanding trading hours [2] Article on the potential risks of 24-hour stock trading
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