Is 24/7 Trading Better?

Abstract

Are daily market closures still needed? In a model of large traders who manage inventory risk, we show that traders engage in aggressive trading in anticipation of even a short market closure, which coordinates and concentrates liquidity. A market structure with a daily closure improves allocative efficiency relative to a continuously open market, even though traders cannot trade during the closure itself. If traders have heterogeneous information about the asset value, trade is less aggressive on the whole, but closure still retains its substantial welfare benefits. A calibration of our model suggests moving to longer, say 23/7, trading hours would be beneficial, but moving to 24/7 trading would harm welfare.