Is sleep for wimps too?

tauringhuang.

Jul 20th 2008
From Economist.com

Extending trading hours makes little sense


WAKING up earlier than your rivals is one of the more primitive forms of human competition. The fight for market share between established stock exchanges and upstart trading platforms has already reached fairly crude levels: customers are now being invited to “colocate” their computers next door to exchanges’ servers to shave milliseconds off their trading times. So it should come as no surprise that Turquoise, a new European platform sponsored by a group of banks, flirted with a cunning plan to outfox its rivals: starting the trading day 15 minutes earlier than them, at 8.45am Central European Time (CET) (7.45am Greenwich Mean Time). In a game of mutually-assured-exhaustion, the London Stock Exchange and Deutsche Börse promptly threatened to open earlier too. This week Turquoise backed down. For now the uneasy sleep-truce reached in Europe in 1999 remains intact. This had harmonised opening times across the continent, forcing London financiers to get up an hour earlier.

In Europe there are three peaks of trading activity: just after the market opens; lunch time, when Wall Street opens; and the hour or so before the close, at about 5.30pm CET. But the morning matters most: that is when price-sensitive company announcements are made and analysts’ reports published. Turquoise’s plan was crafty. By opening only slightly earlier than normal it could be sure that the wider market’s infrastructure—people and systems—was up and running. (Already investment banks engage in over-the-counter trades with clients in the half-hour or so before the market formally opens).

But the very slimness of the window Turquoise tried to exploit reflects the limitations of time-based competition. Had Turquoise aimed to open at, say four or five o’clock in the morning, no competitor would have got out of bed. For unlike commodities or currencies—which are traded continuously and whose prices tend to be influenced by global, macroeconomic factors—trading even large companies’ shares can be a parochial affair. Prices are influenced heavily by small groups of specialist investors, analysts, and company executives, policed by a lead regulator.

Without this cluster of expertise, little trading activity takes place. A recent example involves Fannie Mae, which has a secondary listing in Frankfurt. On July 14th, the day after a rescue plan had been announced by America’s Treasury secretary, trading in Germany opened as it might have on any other Monday (see chart). Fannie Mae’s share price barely moved until the United States woke up, at which point wild swings in the stock began. Generalist European investors had the price-sensitive information, but it conferred them no advantage. Interpreting its impact on a complex company was too difficult and acting on it too risky.

The Frankfurt exchange provides another example of the limits of time-based competition. In 2000, at the height of the stockmarket boom, it was decided that Xetra, the Börse’s main trading system, would close later, at 8pm, to allow more time for investors to make bets. The experiment was unsuccessful and since 2003 Xetra has been shut down at 5.30pm (although some trading in smaller, specialist investment products still continues in Frankfurt until 8pm).

Trading equities is a team sport. So while competitors may try to exploit small scheduling differences, the bulk of trading activity in individual companies will take place in a specific time zone, during agreed and limited hours. The dream of 24-hour trading in individual companies’ shares is likely to remain just that. Which means European investors will still have plenty of time to lie awake in bed, worrying about their portfolios.