They say that stocks go down during the day and up at night
statmodeling.stat.columbia.edu
statmodeling.stat.columbia.edu
* 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.
1016x over 30 years is a gain of less than 0.001% per trading day. You would have spent much more than this through fees and market impact to buy and sell the stock each day, especially at any real volume.
The market is full of uninvestable or tiny capacity trades like this. A reliable pattern gets created by trading flows like the ones described in other replies, and it doesn't get arbed out because it is uninvestable or has tiny capacity.
I've also considered trying some algorithmic trading at lesser known markets, because it is interesting.
Conversely, traditional stock markets is where relatively unsophisticated players do multi-million transactions all the time. This is where the money is. You might need to fight for it or it might be handed over on a silver plate by some redditors.
There are literally thousands of arbitrage experts working 10 hour days looking for true arbitrage opportunities. As a result they’re quite rare.
What's happened is a partition of gains into the night.
Almost like some sort of Laplace demon.
That’s really not how risk works.
Risk reduces alpha. Risk doesn’t increase alpha. Yes obviously in a perfectly rational environment there would be a “need” to reward necessary risk but the market definitely does not need to in this case. More than enough idiots will hold their positions overnight without any upside.
Taking huge risks doesn't in itself mean you'll, on average, be hugely rewarded.
I have an unusual sensitivity to societal grammar, spelling, pronunciation patterns vs the literal rules of language, and only recently has it been clear that most people who use those words use them very consistently incorrectly. This seems to have changed since I was a child.
For all the talk about how the Internet's information educates us, we still need to acknowledge that people need to seek out and be receptive to that information.
Intraday returns: the difference in price from market open to market close
Overnight returns: the difference in price from market close to the next day’s market open.
They are only talking about stocks and they are traded on markets with opening hours < 24h.
The implication seems to be stocks jump at the open then trail off during the day. Thing is most of this is only obvious in retrospect and by the time you realize it the opportunity is gone because it’s now widely known.
Or is this the difference between trading and investing?
> Or is this the difference between trading and investing?
Probably, or rather between purely speculating and investing?
But i don't think there are hard and fast definitions.
See Swing Trading, Day Trading etc. for shorter-term time-horizons. Keeping stocks only intra-day would be Day Trading (generally).
There are lots of people on the internet who say they can 'teach' you day-trading. Don't do it unless you have a very high risk tolerance, i.e. are willing to lose it all and walk away. Even then there's probably better things to do with your money.
Yeah I know, watched a ton of videos documenting the shady things these finance-gurus have done over the years. For a couple of months I was involved in a signal-trading group (I knew them personally), but I never had a good feeling about it and pulled my money without loosing much of it.
After playing around with crypto I've come to the conclusion that a savings and retirements account is probably the better solution for me, even though the interest is laughable. At least the money is safe as long as the global financial system doesn't totally collapse.
In the end I don't care enough about having more money to venture into investing etc., and I'm too scared of being conned by someone.
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.
As for if they're hurting markets, that seems like banning grocery stores and expecting people to buy food from cereal manufacturers.
So, since each stock has a primary exchange, the 'day' and 'night' refer to the time zone of that particular exchange.
Overnight means you take the other side: buy at the close and sell at the open. (This is a bit more complex conceptually as you would never settle the trades and that may be problematic regarding dividends and other corporate actions.)
You never settle the trades? Dividends etc?
Hmm maybe I am 5...
Edit: ok yep so I guess what if they repeated the analysis leaving some time around open/close for chance of trades to settle, would the effect disappear or would this chance beef the key factor for the reported gain?
The analysis is flawed if it doesn't include this as the gains they describe seem essentially unrealisable.
So is the real issue that maybe someone has immediate settlement when the rest don't?
The move to T+2 settlement last decade reduces the requirements, and T+1 later this decade would reduce them further.
Dividends and corporate actions aren't a big deal. Those all have announcement dates and record dates. If you hold the shares at the close of market on the record date, you will get the dividend or other proceeds. So if you always manage to buy at close, you will always get those benefits. The only complication would be if you want to oppose a merger and have standing to sue; or I guess if you were an injured party in any other shareholder lawsuit. Lots of tax paperwork too.
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.
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 shorter hours means sort of 'denser' trading, which in turn means more quantity on the books, tighter prices, and better efficiency.
2. Trading is still done under human direction, or at least under human supervision, so shorter hours are less demanding on staffing. It's possible to run a productive soybean trading desk with two people at the moment. You'd need six people if trading was round the clock, and those people aren't cheap. Or else desks don't trade the whole day, and they miss out on opportunities, and other participants get less competition, and so worse efficiency.
3. Closing the market gives participants time to do various kinds of admin related to trading. Options markets close earlier than their corresponding futures markets, so that options market makers can get their position cleanly hedged. Bond markets close before repo desk traders go to the pub, so that bond trades can get financed.
[1] https://www.eurex.com/resource/blob/2845114/ae56de359f7a578e...
Trading firms can restart their software to fix the memory leaks.
Well, why did they have to restart if they never made any further allocations? This does not add up.
Just because you "preallocate" it doesn't mean that you don't implement a poor man's allocator inside the preallocated buffer.
I buy all the groceries I need from now until the end of time. That's not realistically achievable, from any perspective.
Allocating all the memory you need for a day is realistically achievable. Allocating all the memory you need until the end of time is not realistically achievable.
Still sounds like a leak to me.
It's a perfectly fine way of engineering a system.
There's also a variant of this that's been used on missiles - basically, you put enough RAM on the weapon to guarantee it'll hit its target or run out of fuel before running out of memory.
(Yes, talking about Erlang/OTP here.)
I once was tracking a white whale of a memory leak. Along the way I was able to optimize memory usage of the leaked objects. So I got to the point where I thought maybe the leak was caused by simultaneous read, update, and delete operations on a single key, but by then I'd improved memory usage such that weekly, rather than nightly restarts were needed. The futures markets at the time were 24/7 but with a maintenance period on the weekends, so my boss just told me to leave it and let the restarts garbage collect.
That's not a good argument. If there were more openings for that kind of position, more people would apply, and average remunerations would get lower.
The real problem is that this would effectively distribute wealth (and access to wealth) more widely, and the ruling classes can't have that as a matter of principle.
In liquid markets, "AAPL is $141.23" makes sense. It means that you can expect to buy and sell almost as much AAPL as you want at very close to that price because there are loads of buyers and sellers near that price. You can pretend that AAPL stocks have a price like a lamp at home depot: "I would like 2 AAPL please" is a safe thing to say.
In illiquid markets, "AAPL is $141.23" does not make sense. "I would like 2 AAPL please" is not safe at all. There are bids and offers, but not necessarily a lot of them, and not necessarily near each other. If you were to place the "2 AAPL please" order (or something related like "$500 of AAPL please"), you might find that you have purchased 1 AAPL for $141.23 and 1 AAPL for $299.57 because there was a big gap in the order book. The price abstraction completely breaks down and you have to "haggle" with bids and offers directly.
"Ok," you might say, "liquidity is important, but surely we can just let the bots provide liquidity at night?" The problem is that markets are adversarial and bots can't really deal with "attacks" as well as humans (or at least the humans staking the money don't trust them to). There is all sorts of craziness that a market-making bot can't handle, and if you encourage people to rely exclusively on market-making bots then they can be taken advantage of (oh no, AAPL is down 50%, better sell, wtf, price shot right back up, rage).
It's safer and smarter to just have everyone agree on convenient blocks of time to crowd into the market. During those periods of time the market can be assumed liquid. The price abstraction works.
"But I'm a big boy and I want to live in the danger zone, let me trade at night!" Go right ahead. It's not only possible, it's readily available and people do it all the time. You can probably request some degree of after-hours trading from your brokerage right this minute. It's usually pretty easy -- usually you just have to ask for them to enable permission and promise that you know what a limit order is. Usually market orders are disabled, too, because they know that plenty of people would hit "accept," shoot themselves in the foot, and complain anyway :)
You can't settle on a bank holiday, because the banks are closed. If you trade on a day you can't settle, you're going to have two days of trading settling on the same day later, which is going to be weird.
For example, if there’s a US holiday on a Friday then EUR/USD trades conducted on the Wednesday and Thursday would both typically settle Monday.
I guess they could hire a second and third shift, but they also could have done that back when stocks were traded on paper and over the phone. The will just isn't there.
regular market ends 3:59:59pm NY
post market starts 4:00pm NY, ends 8:00pm NY
correct?
8pm to 7am there’s no way to trade something like SPY and to be honest as a retail investor, can i even buy pre/post market on like, fidelity?
There's also S&P (ES), NASDAQ (NQ) and other futures. They trade 23/6, closing at 5pm EST on Friday and reopen on Sunday at 6pm EST. Otherwise, they're trading 23 hours a day, except between 5pm and 6pm EST Mon-Fri
https://www.interactivebrokers.com/en/?f=%2Fen%2Ftrading%2Ft...
https://ir.cboe.com/news-and-events/2021/06-15-2021/cboe-ext...
https://www.reddit.com/r/options/comments/xr3gqb/where_can_i...
It's honestly too much work for me to do anything else and the market is too volatile right now
How profitable are you doing that?
I've been trading for a while and don't suggest to others to trade futures[0]. It's essentially highly leveraged stock, but less risk than options.
If instead I pick my starting point as Jan 1, 2012, I see $1.15 for day trading vs $2.24 for overnight trading. (Note that there was again another black swan event in Feb-March 2020, before which point day trading was actually doing better than overnight trading.)
Tracking deltas (well, day-over-day multipliers) as you suggest since 1990 shows that the two shapes are qualitatively more similar (although day trading is more volatile):
- 0.1st percentile: day trading: 0.803 vs overnight trading: 0.871
- 1st percentile: day trading: 0.932 vs overnight trading: 0.960
- 99th percentile: day trading: 1.059 vs overnight trading: 1.052
- 99.9th percentile: day trading: 1.189 vs overnight trading: 1.222
Totally agree with the other poster though. You can pretty much prove whatever you want in the market depending on the start date and window size.
I would think the driving factor is after market earnings releases, expectations for those releases and how many there randomly happen to be during the window in question.
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.
Surely if the risk was real, the stock would actually go down sometimes, and cancel out the "free lunch", and on average there would be no effect to explain!
And you could see an effect in some individual stocks of traders whose strategies rely on reacting to stuff fast allowing traders whose strategies don't to profit by risking holding onto the stock for at least several hours, even if the average effect was zero because a few other stocks did have bad news overnight giving the bagholders of those stocks big losses...
Look at the lengths people will go to for a nonvolatile risk-free return in bonds or bank accounts - but they know they can only lose a few percent if things go wrong (eg. interest rate rises).
If you take that volatility risk, you are rewarded for it with higher returns, on average :)
But another reason is that people are selling it before close, which lowers the price then buy again on open - which increases the price. Many day traders will close out their trades at the end of the day and start again the next day so they can't loose anything overnight, although they can't gain anything either - they're willing to loose that for the peace of mind.
(2) many (most?) large companies announce financial results after market close. Assuming that's one of the long-term drivers of change, it makes sense there's more net movement when you include those.
There’s a bunch of speculation on why this happens: https://www.ft.com/content/1cc17824-3077-4e39-9a99-cbccc83a2...
But the main factor in the divergence in that chart in 2008-9 - as one of the comments points out - is that AIG announced a lot of bad news during the financial crisis during the daytime but never collapsed overnight.
Has a pretty high expense ratio as it's not cheap to implement this strategy and there is no competition at the moment.
[0] https://www.sciencedirect.com/science/article/pii/S154461231...
> In general this strategy is profitable, both for the full sample and for individual years, but in most cases the results are not statistically different from the random trading case, and therefore they do not represent evidence of market inefficiency.
Another hypothesis for the wood chipper
There are lots of things "they say" about the markets, "sell in May and go away" is another famous one.
Most of it pure BS, some of it is half-true, and the rest are sayings that date back to the "good old days" pre-HFT, Hedge Funds and leveraged trading.
Frankly "stocks go up at night" is a ludicrous proposition.
Feel free to give it a go, but corporate actions, corporate RNS, world events ....."events dear boy, events" will very happily shit on you from a great height if you think you're going to make money through short-term overnight holding.
"Time in the market is better than timing the market" is about the only true saying that remains.
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.
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.
Is it surprising to you that the effect was larger for AIG around 2010? As AIG was going bankrupt and the common stock holders were effectively getting wiped out, individuals were willing to hold AIG during the day to play crazy intra-day volatility but unwilling to hold AIG overnight because most announcements around restructuring were happening overnight.
Of course at the time short sales on a list of stocks including AIG were forbidden. So even if you ignore the fact that most day traders etc prefer to play things on the long side, you have the issue that they couldn't play the short side even if they wanted to.
For example, if you take a bet that is expected to make +/-1000 dollars with an equity portfolio, and it's long only, it's like tossing one coin to determine whether you make 500-700 dollars of the 1000 and then tossing coins repeatedly to determine the outcome of the remaining 300-500 dollars one dollar at a time. If the portfolio was market neutral, i.e. long and short in equal amounts, it's like you toss the coin 1000 times, each coin toss determining only 1 dollar of the outcome. If you believe the coin is biased even somewhat in your favor, as it usually is when you are trading a high quality strategy, the second option is far better.
Given the kind of risk-adjusted returns achievable by a firm that could trade cheaply enough to take advantage of this effect by other means, even using relatively simple well-known strategies, doing this would hurt their risk adjusted return and the returns they could generate on their risk capital. So the odds that there is a large long-lived firm doing this to mark their book and causing this effect is likely close to 0.
Others have mentioned several explanations for the effect. To this I will add one more, which I think is at least, if not more likely than the rest. Retail day-traders, some of whom are larger than people realize have a long bias, ie they are far more likely to hold a stock long than short sell it and they tend to close out their positions at the end of every day.
Seems like the authors have an axe to grind more than a point to make. The paper reads like the kind of certainty a completely uninformed but (markets are made up of evil people) true-believing crusader has. To me it seems like the kind of situation where someone doesn't yet know enough about a subject to know how little they know, in this case buttressed up by the broken credentialing system we call our education system.
The claim in my opinion is complete nonsense.
Edit: Fixed grammar.
There is no real regulation.
-Market Manipulation happens all the time.
-Large institutions, Hedge Funds, and MM can make the market do what ever they want (within reason and time).
-Cellar Boxing is real.
-Latter Attacks are real.
-Placing fake buy and sell order.
-PFOF is a scam.
-Waving your friends Billion $ margin
-Using Fake funds as collateral to beat margin
-Internalizing orders.
-Synthetic shares...
-Family Institutions
-Self Reporting
-Fail To Delivers can go on for years.
-Manipulation real value by placing sell orders on LIT exchanges and buy orders in "Dark Pools"
-0 fraction reserve lending.
-Hide position is Swaps.. Which are not reported...
I mean come on....