Curatia Analysis for Mon, Jun 10, 2024

As Traders Turn to After-Hours Markets to Traverse the Globe, Overnight Trading on OTC Markets Aims to Connect East and West  Sponsored

Jason Dibble Co-Founder, Editor in Chief

Explosive growth in the number of venues offering extended trading hours has unlocked a wealth of opportunities for retail investors eager to trade across regions.

Now exchanges are increasingly exploring extended-hours offerings of their own in hopes of wooing not only retail investors but also institutional traders with promises of timelier trading and enhanced profits in less liquid markets — a movement OTC Markets is spearheading with an overnight trading launch slated for the end of June.

Overnight Transformation

After largely holding steady for decades, trading hours at stock-trading venues around the world have undergone a rapid recent metamorphosis. A pandemic-era profusion of remote-working day traders has spurred retail brokerages to extend their trading hours with an eye toward luring investors eager to trade across regions during their working day.

Online investing platform Webull became the latest retail brokerage to launch 24-hour trading last month with an offering allowing users to trade US stocks and ETFs in key Asia-Pacific markets. It joins rivals including Robinhood, Interactive Brokers, Charles Schwab, Futu, and FlexTrade in offering overnight trading.

The growing prevalence of such offerings reflects their popularity with traders and, by extension, their increasing indispensability to stock-trading platforms. Robinhood’s overnight trading push has coincided with a return to profitability — an unsurprising outcome given that as much as a quarter of total trading volume on its platform occurs outside traditional market hours.

A February partnership between Blue Ocean, whose trading engine for Asia-Pac investors looking to buy and sell US exchange-listed securities has been a key driver of overnight-trading growth, and DriveWealth, a platform offering plug-and-play brokerage services to would-be trading apps, suggests overnight trading will become a de facto standard for retail brokerages going forward.

Brokerages are even introducing overnight trading into asset classes that are traditionally the province of professional traders. In April, Interactive Brokers, known as one of the most sophisticated retail-trading platforms, extended its trading day for US Treasuries from nine hours in length to 22 as retail brokerages increasingly compete on the breadth of services they offer.

Reverse Osmosis

With crypto, major currencies, US Treasuries, many stocks, and leading stock-index futures already trading nearly around the clock, all-hours trading is quietly becoming the norm across asset classes.

Burgeoning retail interest in increasingly “complex” asset classes from options to sovereign bonds underscores professional trading’s trickle-down influence on retail investing. But the development also highlights the reverse osmosis of off-hours trading from the retail realm back into the professional sphere.

That broader movement has gathered pace of late as firms in the trading space revisit the conventional wisdom that off-hours trading holds little for them. US stock exchanges have begun exploring extending their trading hours to not only draw retail activity but also lure institutional investors interested in trading against news developments around their holdings in other regions in real time.

In March, upstart 24 Exchange submitted a revised application to the SEC to launch a round-the-clock US stock exchange. Backing for the initiative from the venture arm of Steve Cohen’s Point72 hedge fund underscores buy-side interest in all-hours stock trading.

The New York Stock Exchange meanwhile polled market participants in April on the merits of round-the-clock trading. While the NYSE has yet to make the results of the poll public, some European market participants have expressed concern that longer trading hours could exacerbate liquidity issues and pose quality-of-life issues for traders in Europe and the UK, where trading hours are already the longest in the world to maximize overlap with stock markets in the US and Asia.

Even so, the NYSE poll could reveal surprising demand for longer trading hours among professional traders. While the illiquidity of extended-hours trading has traditionally turned off institutions interested in trading blocks of stock into liquid markets to minimize price slippage, that illiquidity offers a path to enhanced profitability for market makers looking to capitalize on wider spreads.

Surging retail demand for extended-hours trading is also encouraging established US stock exchanges that normally cater to professional traders to market the speed, scale, and reliability advantages of their infrastructure to retail-trading platforms. Blue Ocean announced in February that it would license the technology platform of MEMX, the US stock and options exchange backed by numerous market makers known for their prowess in trading technology.

Established US stock exchanges’ growing focus on all-hours trading could in turn unlock overnight trading for more sophisticated professional traders.

“The migration will give us the ability to go after more sophisticated customers, such as high frequency traders, who demand a high level of reliability and stability,” Blue Ocean CEO Brian Hyndman told Markets Media in February.

Wealth of Opportunities

As exchanges extend their all-hours trading forays, one industry player well positioned to evaluate its potential is lighting the way forward. At OTC Markets, 83% of Q1 dollar volume traded was in international securities. That makes the venue an ideal place to gauge demand for trading across regions outside normal trading hours by retail and professional traders alike.

OTC Markets announced last month that it will launch overnight trading in late June. Broker-dealers can connect to its overnight-trading platform to provide their customers access to the most active OTC equity securities from 8pm to 4am Sunday through Thursday via an SEC-registered alternative trading system with a fully electronic central limit order book.

The first-of-its-kind offering will give traders access to thousands of cross-traded global securities transacted in US dollars. They include iconic brands like Adidas, Air Canada, BNP Paribas, Bombardier, Danone, Heineken, LVMH, Nestlé, Nintendo, Roche, and Tencent.

Data providers can meanwhile connect to OTC Markets’ comprehensive multicast market-data offering featuring top-of-book and depth-of-book data.

The offering, dubbed OTC Overnight, unlocks a wealth of opportunities for investors of all stripes. Traders in Asia, for instance, will be able to transact in securities like ride-hailing app DiDi following its 2022 delisting from the NYSE – a key consideration as deteriorating US-China relations complicate efforts to trade China-based companies in the US.

Traders based anywhere in the world will also be able to trade European securities either before European stock markets open or after they close — a possibility that allows investors to trade against pre- or post-market European earnings announcements in real time. Shorter European trading hours would only strengthen that use case.

“Just as European markets have long spanned the North American and Asian trading days, OTC Overnight leverages US capital markets to build a bridge between Europe and Asia,” OTC Markets EVP of Market Data Matthew Fuchs said. “It provides investors a unique level of global access and choice while giving issuers a simple way to tap into new investor bases.”

Professional traders could also benefit from OTC Overnight in other ways. Market makers will be able to trade into less liquid markets, where wider spreads enhance profitability, while still holding liquid securities. They’re likewise eager to interact with retail flows that constitute the lion’s share of trades across regions, since doing so can be more profitable than taking the other side of trades with savvy institutional investors.

For trading firms, regulatory strictures in Europe and Asia can also make accessing those markets indirectly via after-hours trading preferable to incurring the time and expense of establishing a physical presence in those regions.

OTC Overnight even offers investors frictionless after-hours access to Canadian securities. That prospect could hold particular appeal for Australian traders, since the two countries share large markets in commodities and mining.

Canadian securities could similarly be an area of interest for multi-manager hedge-fund giants like Citadel, Millennium, Balyasny, and newcomer Jain Global, which have been both expanding internationally and beefing up their commodities-trading operations amid the unfolding global pivot to clean energy.

Strong Prospects

That diversity of scenarios and market participants highlights the strong growth potential of OTC Overnight and after-hours trading more broadly. Just as Blue Ocean has unlocked access to coveted US exchange-listed stocks for retail investors in Asia, OTC Overnight will be the simplest way for Asia-based investors to access roughly 3,000 European securities as well as liquid US OTC names like the Ethereum Trust (ETHE) during regular trading hours.

US markets’ move to a T+1 settlement cycle could also push more trading across regions to OTC Markets’ platform, where trading occurs in US dollars, to route around narrower currency-conversion windows when crossing time zones. OTC Overnight’s security set is restricted to DTCC-eligible securities that can clear and settle in the US to avoid international settlement issues.

A move by regulators to shorten the European trading day — whether to bolster liquidity, improve traders’ work-life balance, or accommodate post-trade processing in a move to a T+1 settlement window — likewise strengthens the case for overnight trading to allow traders around the globe access to European markets outside local trading hours.

Retail trading meanwhile continues to flourish in buoyant stock markets. Off-exchange volume, often used as a proxy for retail activity, hit an all-time high of 51.6% last month, eclipsing the prior peak hit during January 2021’s meme-stock craze even as US stock markets surged to new record highs.

The much-anticipated global pivot to central-bank rate cuts will likely reinforce that trend by boosting companies’ growth prospects via access to cheaper capital.

Those dynamics could support growth in extended-hours trading for years to come — even if those years seem to gradually dissolve into one interminable trading day.