Nocturnal Trading

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.

Keywords: Nocturnal Trading, Dark Pools, Wholesalers, Execution Quality

JEL Classification: G20, G24, G28