At the end of June, the Federation of European Securities Exchanges (Fese), rejected a call from traders to shorten the trading hours of the regions’ exchanges. This issue has been bubbling for a few years but advances in connectivity and technology could help pacify both sides.
The major European markets run for eight and half hours, longer than those in North America and Asia. This means international organisations ensure a continuity of trade flow and risk management, with traders handing over to counterparts in the next time zone to ensure a ‘follow the sun’ model operates. By opening longer, European markets can overlap with both the Asian market close in the morning and US market open in the afternoon.
This way of operating has long been effective, so why change? Shorter hours have been seen by many, particularly in London (which opens an hour earlier at 8am to sync with continental Europe), as a way of improving work / life balance for employees and offering a more inclusive and diverse workplace, especially for those support functions who start much earlier.
Fese stated that a shortening of the day would be detrimental to the European market and they were concerned that liquidity might be pushed off exchange outside of market hours, into less well-regulated areas such as SIs and OTC venues. Although they acknowledged the problem of long working days, they said this was best solved by the employer.
But in today’s world of cutting-edge connectivity and rapid advancements in technology, where markets around the world can talk to each other in a matter of microseconds, could there not be a better solution?
High speed and low latency links, available via a Financial Extranet, allow trading participants located around the world to access an ecosystem of different exchanges and MTFs globally via a single connection. Liquidity can be more evenly proportioned by ensuring that exchanges have better links to price makers and takers throughout the world, instead of their own regions or at specific cross over points.
Increasingly, lit venue trading volume has been pushed towards the beginning and end of day auction periods, decreasing the importance of the period in between for robust price discovery, and negating the need for longer trading days. To counter this problem, exchanges have been adding auction periods throughout the trading day but the trend has continued nonetheless.
Volume seeking algorithms such as VWAPs and those developed in house by brokers have exacerbated the problem by perpetuating the cycle of scrambling to trade at the beginning and end of the day. However, by spreading the pool of connected parties more widely, in different time zones, you may see a more even volume curve. The trading practices of desks located in the same vicinity as their national exchange, could well be shifted by the practices of a trading desk located on the other side of the world.
As you only need one connection to an Extranet it can also give you access to pan border exchanges that list securities across multiple jurisdictions, as well as the main national bourses. This allows for a more cost-effective way to access a wider pool of liquidity where previously each exchange would require a separate connection that might have been cost prohibitive. Increasingly exchanges themselves are diversifying and offering cross country offerings to grow market share.
By allowing technology to help the problem of harmonising intercontinental trading, as well as ensuring liquidity is maintained, we could have a better solution to this ongoing debate. In the meantime, alarm clocks will continue going off at 5am in the major European Financial centres as employers start their working days.
Michael James, Business Development Manager – Capital Markets