Nocturnal Trading

Explores nocturnal trading's impact on U.S. equity market, with significant price discovery found between 8 p.m. and 4 a.m.

Paper Metadata

• Publication Date: 2025-03-20

• Source: SSRN

• Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5181159

• Authors

  • Gregory W. Eaton (Contact Author), Department of Finance, Athens, GA 30602-6254, United States,

  • Andriy Shkilko, LH 4050, 75 University Ave. W., Waterloo, Ontario N2L3C5, Canada, 548-889-4497 (Phone),

  • Ingrid M. Werner, 2100 Neil Avenue, Columbus, OH 43210-1144, United States, 614-292-6460 (Phone), 614-292-2418 (Fax),

• Related Readings:

  • Overnight Trading: Definition, How It Works, and Example

  • The price continuity, return and volatility spillover effects of regular and after-hours trading

  • https://blueocean-tech.io

Keywords

• 24 Hours Trading

• Retail Trading

Notes for Review

Recommendation: 95%

This paper examines the growing phenomenon of nocturnal trading in the U.S. equity market, where alternative trading systems offer trading between 8 p.m. and 4 a.m. The authors document the explosive growth of nocturnal trading in recent years and find that while effective spreads are worse during nocturnal hours, realized spreads are comparable or better. The paper also investigates price discovery during nocturnal hours, finding that significant price discovery takes place, particularly for exchange-traded products. Using a quasi-natural experiment, the authors study the impact of nocturnal trading on pre-open, regular, and after-hours trading. The paper's findings have important implications for market microstructure and high-frequency trading. With its strong data-driven approach and focus on a major market, this paper is a must-read for quant researchers. The authors' reputation and affiliation with well-known institutions add to the paper's credibility. Overall, this paper is a valuable contribution to the field and deserves a high read recommendation score.

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Abstract

While several venues have offered trading prior to the U.S. equity market open and after the close for decades, only recently have alternative trading systems started offering trading between 8 p.m. in the evening and 4 a.m. the next day-nocturnal trading. This innovation enables U.S. retail investors to trade U.S. stocks and exchange traded products 24 hours, five days a week. Importantly, it also enables Asian investors to trade U.S. stocks during Asian business hours. We document the explosive growth of nocturnal trading in the last three years-a development that has recently motivated several additional venues to seek SEC approval to also offer nocturnal trading. We find that while effective spreads during the nocturnal hours are worse than during regular trading hours, realized spreads are about the same or better. We also find that significant price discovery takes place between 8 p.m. and 4 a.m., particularly for exchange-traded products. Finally, we rely on a quasi-natural experiment to study how nocturnal trading affects pre-open, regular, and after-hours trading.