The World Federation of Exchanges (WFE) recently published “Policy and market impacts of extended trading”, a paper studying the implications of lengthening equity market hours. Defining extended trading as the more realistic 22/5 or 23/5 models instead of true 24/7, it cautions that longer hours are not appropriate or desirable in all contexts.
There are currently five trading sessions: early hours, pre-market, normal trading hours, closing auction, and post-market. The paper reveals that most WFE members currently run on some or all of these sessions. To achieve extended trading, many markets would “only need to add an additional overnight session” – but it doesn’t mean it should be done.
The paper analyses the pros and cons of extended trading from four main perspectives: investor demand, market considerations, operational demands, and post-trade requirements.
A liquidity question
Under post-trade requirements, the main concern is liquidity. “Extended trading hours require constant price formation and real-time margin recalibration”, the paper points out. Within normal banking hours, access to liqudity and settlement infrastructure ensure that members are supported should they need to meet increases in initial margin, or respond to intraday margin calls issued by CCPs.
On extended models, such access will be limited outside of normal banking hours. It will “necessitate round-the-clock surveillance and staffing, as well as considerations for funding during hours in which funds cannot be moved”.
“Some WFE members have sought to mitigate this challenge by creating arrangements with foreign banking institutions to facilitate out-of-hours margin movement, or by requiring prefunded margin buffers,” the paper states. These options are limited by product-specific risk profiles. It suggests that “a more scalable holistic approach might involve revisiting collateral eligibility, exploring weekend settlement mechanisms, and engaging with payment systems providers to extend operating hours where feasible”.
Not the only option
The 22/5 and 23/5 can be a “pragmatic and measured step” towards true 24/7 trading, but 24/7 trading “should not be viewed as an inevitability”. It brings with it “material implications for post-trade processes, supervisory oversight, system resilience, and the broader financial ecosystem, all of which must be considered carefully”.
To conclude, the paper stresses that different models can exist, and that flexibility, innovation, and market diversity should be supported. “The conversation around 24/7 trading is not about whether markets can remain open at all hours – it is about how to achieve such a model in a manner that protects investors, strengthens market integrity, and enhances global competitiveness”.
