Does Extending Trading Hours Really Increase Volume?
There have been quite a few Asian Exchanges who have opted to extend their trading sessions to align themselves with other markets to offer investors an opportunity to react to news in different geographies. But what impact does this have on trading in those markets? Do volumes rise as investors have more opportunities to trade? Or are the same trades spread out over the day reducing liquidity and pushing spreads wider?
Recently, Kathryn Zhao, Executive Director, Head of Linear Quantitative Research Asia at J.P. Morgan shed some light on these questions. She gave a microstructure presentation at TradeTech China using data from the National Stock Exchange of India (NSE) which increased the trading day by 55 minutes last year when trading began at 9am from 9:55am. Her findings were very interesting. She found that volatility decreased and average spreads remained almost the same. Also, the shape of volume profile was unchanged with smaller participation ratios in the middle of the trading day. At the same time, the number of trades per minute as well as the average trade size decreased. She found that both notional traded and trading volume did decrease as well. Her conclusion on volume increasing when trading hours were extended was “really there is no conclusion” because there is no causal relationship between them and many external factors could affect trading volume.
As the evidence for India shows it seems that traders are in no rush to trade to take advantage of the longer trading session and that orders remained posted longer. Granted, there are other macro factors that could have impacted the microstructure on the NSE such as capital inflows and economic growth but her findings were very interesting indeed.
Just this past week the Stock Exchange of Hong Kong has increased trading by an hour and then will do so again by an additional 30 minutes on March 5, 2012. In May, the Tokyo Stock Exchange and Osaka Securities Exchange (OSE) will increase their morning sessions by 30 minutes running from 9am to 11:30am. The evening session too will be extended to 3am. Singapore will eliminate its lunch period all together in the second quarter of this year awaiting approval from the regulator.
NYSE LIFFE recently extended their trading hours for its FTSE 100 index future to coincide with the Asia time zone by opening at 1am GMT.
As Kathryn continues her research to offer further Asia market microstructure insights when these other exchanges reveal trading data a more definitive answer can be reached on whether or not volumes do in fact increase when exchanges extend trading hours. However, it will likely raise new questions.