The rise of the cryptocurrency market has shown many people that it’s possible to trade 24/7. Before now, the CFDs market was open 24/5. So why does the stock market close instead of staying open round the clock?
The stock market closes because there’s thin liquidity during after-market hours. The tradition stretches to the early years of stock trading when administrative duties had to be concluded at the close of business. Stock trading isn’t 24/7 today because the major players still prefer the status quo.
The rest of the article will explain why the stock markets close and why stock trading isn’t 24/7. We’ll also look at the options you can explore if you’d like to trade round the clock.
Why Does the Stock Market Close?
The stock market closes for a variety of reasons, including the following:
Hold Over From Pre-Computerized Stock Market
To understand why the stock market closes, you have to first look back at how the stock market worked in the years before high-speed computers.
Before the stock market became computerized, quite a few important processes had to be completed manually by workers at the trading floor and across listed businesses. For example:
- The closing share price had to be concluded and displayed in analog form.
- The share certificates featuring the names of the new owners had to be sent via post.
- The company ledgers had to be reconciled.
- All settlement processes had to be completed.
The bulk of these processes had to be completed by telephone, fax, or post. Therefore, they all took a long time to complete. The market had to close an hour before the close of business to ensure that the relevant staff could have enough time to complete these processes before heading out for the day at 5 pm.
Also, market participants had to be physically present on the exchange to carry out trades. With most of them only working normal hours, it made sense to close the market when everyone had gone home and limit trading to the period with the highest level of activity.
Continuation of the Pre-Computerized Stock Market Status Quo
Today, the stock market still opens at 9.30 am and closes at 4 pm Eastern Time. You may wonder why that is the case, seeing as we now have powerful computers and processes that have eliminated the challenges discussed above.
The reality is that the bulk of the major players in the stock market are still most active during the standard trading hours (which also doubles as the standard work hours).
While staying up all night to monitor positions may interest traders of other financial products, stock traders prefer the routine of trading only during standard working hours. A few experiments on a 24-hour stock market have come and gone, further highlighting how stock traders are stuck in their ways.
The fact that most major company announcements (such as earnings news) and general economic data (like unemployment and inflation) also happen during market hours has further cemented the stock market schedule.
Traders know that market-moving events are likely to happen during working hours and the exchanges know that there’s no need to maintain a market when there’s very little chance of strong market movement on either side.
Low Liquidity and Increased Risk of Slippage
With most stock traders active during the main market hours, trading after the market has closed exposes traders to slippage risks due to low liquidity. You’re more likely to get better prices when there are 10 million traders in the market compared to when there are only 500,000 traders.
To prevent large slippages, the exchanges stay closed to keep retail traders safe.
Why Isn’t Stock Trading 24/7 Today?
With the technological advancements we’ve made thus far, it defies logic that the stock market isn’t still a 24/7 market like the cryptocurrency market. Some people believe that the stock market would be a 24/7 market if it was created today, and it’s easy to agree with that assertion.
Stock trading isn’t 24/7 today because the majority of the traders still prefer to trade during the standard market hours. For some, it’s a matter of trading during conventional working hours. For others, it may be about trading during the period with the best possible market-order fills.
How To Trade the Stock Market Round the Clock?
It’s impossible to trade a specific stock market round the clock. For example, the NYSE will only stay open between the designated hours. Traders with access to Electronic Communication Networks (ECNs) can enjoy pre-market and after-market hours trading, but even these traders can only access the market no more than five hours pre or post-market open and close.
If you want to trade the stock market in general round the clock, you have to trade stocks from different parts of the globe. There’s always a market open somewhere. As the US markets close, the Asian and Australian markets open. As both of them close, the European markets open.
The continuous overlap allows you to stay in the market as long as you’re interested in trading stocks from these regions.
However, even with this approach, you can’t trade during the weekend unless you go offline outside the exchanges and the ECNs. The cryptocurrency market remains the only round-the-clock market that’s open to everyone in the real sense.
There’s an argument for how tighter regulations have made it harder for the stock market to follow the crypto market in that regard.
The largely decentralized crypto market means that anyone can open and close positions whenever they want with little or no bureaucratic bottlenecks to navigate.
The stock markets are different. There’s legislation on who can and can’t trade the market, and brokers make their own rules about how participants can trade. Occasionally, you’ll get scenarios like Robinhood halting trading in certain stocks.
So, when you combine the seeming lack of interest in a round-the-clock stock market from traders and the bureaucratic bottlenecks that make a 24/7 market unrealistic, you’d get why we’re unlikely to ever see the stock market open and close times phased out.
Pre-Market and After-Market Hours Trading
If you’d like some more time to trade the stock market during the week, you can take advantage of the pre-market and after-market hours, which allow you to start trading hours before the market opens and after it closes.
Pre-market trading occurs between 8 and 9.30 am Eastern Time each trading day. Some brokers (direct access) allow trading from as early as 4 am. However, barring any market-moving news, you’d find little activity during this period. Liquidity will also be very thin. Slippages due to very wide bid-ask spreads are commonplace.
ECNs like Bloomberg Trade Book (BTRD), Island (ISLD), Instinet (INCA), and Archipelago (ARCA) are some of the most popular places to look for pre-market trading. However, you can only open positions with limit orders.
In 1991, the NYSE started after-market trading as a response to the competition from exchanges in Europe and Asia. It has continued till today, allowing traders to continue trading up to an extra four hours from the closing bell.
As is the case with the pre-market trading, there is low liquidity during this time, with most after-market traders closing by 6.30 pm.
Again, only ECNs offer after-market trading. Traders stay on for after-hours trading to take advantage of any breaking news that may hit the wires after the exchanges have closed.
The stock markets close because the bulk of the trading liquidity and volatility accumulates during the conventional work hours. The exchanges have no incentive to stay open round-the-clock, and there may be lots of legislative bottlenecks to navigate before 24/7 trading is made available to everyone.
If you want to keep trading the stock markets well beyond the standard close times, you should explore trading stocks from other markets in addition to after-market and pre-market trading.