The answer is simply that more than 3/4 of liquidity events occur outside of market hours. People especially academics who bring this up are idiots.
They say that stocks go down during the day and up at night
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Re: They say that stocks go down during the day and up at night
#42> If you invested $1 in AIG at the start of 1990 and received only intraday returns
This is the problem with all stock market related articles: they all hinge on if you had done this or that. They never tell you I actually performed these two strategies and here are the results.
It would be quite simple to perform such experiments but it seems that it is either never done or is perhaps kept confidential.
Re: They say that stocks go down during the day and up at night
#43There are several explanations for this phenomena:
* The largest moves in price occur after quarterly earnings announcements, which are released after-hours. Same with other material announcements.
* Prices are more volatile after-hours because there are fewer market participants. Because the order book is smaller, the same sized trade will have a larger effect on price after-hours compared to during trading hours.
* Some traders at hedge funds are limited on how much $ they can hold overnight by risk management. This is because there is less liquidity and it is difficult to unload if a position implodes overnight. To reduce risk, they sell end of day, and buy back after market open.
* For the above two reasons, holding overnight confers more risk, which will be rewarded by the market with higher returns.
* (personal speculation): The "positive returns for holding after-hours" effect reflects the general trend of the stock market. Stocks have trended upwards for the past several decades, so the effect is currently positive. If stocks were to trend downwards for several years, I'd expect this the after-hours effect to also be negative. I have not backtested this.
Re: They say that stocks go down during the day and up at night
#44Since the article is not very informative, and it's a real rabbit hole to try to track this stuff down across all the linked articles etc. and as I don't even really care about stocks and the market, I am only left with one question which I did not find answered anywhere yet - what exactly does day and night mean in the context of the whole world trading?
> I am only left with one question which I did not find answered anywhere yet - what exactly does day and night mean in the context of the whole world trading? While we're at it, I have a related question: why do the exchanges even "open" and "close"? Surely in our globalized digital economy, it's not just "day" and "night" that are meaningless, but the very concept of "opening hours" itself.
The world of finance is full of anachronisms like this. Exchanges are also closed on various bank holidays which are different in every country.
Re: They say that stocks go down during the day and up at night
#45> If you invested $1 in AIG at the start of 1990 and received only intraday returns This is the problem with all stock market related articles: they all hinge on if you had done this or that . They never tell you I actually performed these two strategies and here are the results . It would be quite simple to perform such experiments but it seems that it is either never done or is perhaps kept confidential.
In this case I'd expect the costs of trading in and out of the position everyday to be prohibitive. Even if your broker doesn't charge you anything (or you are a prop trading desk with zero trading fees), just paying the spread every day would add up quickly over time. It might not be possible to perform such an experiment at all in the real world.
It's still interesting from an academic standpoint though, if only to show how long term pricing inefficiencies can persist over long time periods even in otherwise efficient markets.
Re: They say that stocks go down during the day and up at night
#46Earlier quoted context omitted.
> I am only left with one question which I did not find answered anywhere yet - what exactly does day and night mean in the context of the whole world trading? While we're at it, I have a related question: why do the exchanges even "open" and "close"? Surely in our globalized digital economy, it's not just "day" and "night" that are meaningless, but the very concept of "opening hours" itself.
Probably due to labor unions.
As a profession, Wall Street traders could not be farther from unionized.
Re: They say that stocks go down during the day and up at night
#47Earlier quoted context omitted.
> I am only left with one question which I did not find answered anywhere yet - what exactly does day and night mean in the context of the whole world trading? While we're at it, I have a related question: why do the exchanges even "open" and "close"? Surely in our globalized digital economy, it's not just "day" and "night" that are meaningless, but the very concept of "opening hours" itself.
The world of finance is full of anachronisms like this. Exchanges are also closed on various bank holidays which are different in every country.
Yup, that's why I think that stories about the benefits of having HFTs providing micro-second liquidity are bunk. Even without holidays and weekends, large stock exchanges only operate 7 hours per day, with a 17 hour gap of non-liquidity every day.
Re: They say that stocks go down during the day and up at night
#48There's a few (often contradictory) explanations for this. My favourite is: Things that can be sold quickly are safer (because you can sell them if bad news comes out) so are worth less than less liquid things, like holding stocks when the market is closed. So by holding stocks overnight you are being payed for taking on the risk by those selling them before closing.
That would depend on what the stock is, right? If you are holding 1 stock of spy you are better off holding overnight than holding cash overnight. Look at the 5 year chart for cash vs spy, holding spy beats holding cash.
Re: They say that stocks go down during the day and up at night
#49Earlier quoted context omitted.
Historically, it's because exchanges were real places that people went to, and it would be expensive and pointless to run them all night. These days, there is a trend towards opening hours getting longer (eg [1]). But there is still value to limited hours. Off the top of my head: 1. Liquidity gets concentrated. If there is a fixed amount of end-user demand (inflows into pension funds, oil production to hedge), then s…
>Closing the market gives participants time to do various kinds of admin related to trading. Trading firms can restart their software to fix the memory leaks.
Just another generation in the garbage collector.
Re: They say that stocks go down during the day and up at night
#50Earlier quoted context omitted.
As someone who doesn't know much about stocks and trading - is it normal to keep stocks for only evening or evening -> morning, what about morning -> morning, or even longer timespans? Or is this the difference between trading and investing?
It’s just parasitism on top of the legitimate activities of the market (capital allocation). People who benefit from it (market administrators, traders) like to pretend it increases the liquidity of the market and that it’s a good thing. How you appreciate this argument generally directly depends of how much you stand to gain from it being accepted.
HFT/market making is good for retail investors. Otherwise you'd have a lot more trouble and higher fees investing eg $100 at a time.