Starting next week, stock transaction settlements in the USA will be faster, conducted within one day. This is also a step towards 24-hour stock trading, which the American NYSE has been advocating for. Interestingly, according to historical data, the highest stock market gains occur at night—this phenomenon is known as the “overnight effect.”
Beginning next week, stock transaction settlements in the USA will proceed more quickly. Starting from Tuesday, May 28th (as Monday in the USA is a public holiday, Memorial Day), the exchanges will settle their transactions on a T+1 basis—one day after the transaction is made. The aim is to shorten the time between the transaction and its settlement, thereby reducing the risk of any problems arising during this period. However, this will create some disharmony between American and European regulations, which have so far assumed settlements on a T+2 basis (two days after the transaction). In Poland, settlements are still carried out by the stock exchange along with the National Depository for Securities within two days.
Transaction settlements are following the increasingly fast-paced investment world towards instant settlements. This has been happening gradually since the 1987 stock market crash on Black Monday. In 1995, settlements were changed from T+5 to T+3, and in 2017—to the current T+2. By comparison, in China, transactions are settled even faster, on a T+0 basis, and in India—on a T+1 basis.
Improving the speed of settlements is one of the necessary elements for introducing 24-hour stock trading. Many investors are asking why they can only trade during exchange working hours, and not like in the forex market, practically around the clock. Today, clients of some brokers already have access to quotations for some stocks outside of standard trading hours.
The American regulator is therefore considering NYSE’s proposal to introduce 24-hour stock trading. This would be a fundamental change, the biggest since the introduction of the permanent six-day trading week in 1871 and its later reduction to five days in 1952.
Perhaps the first step towards 24-hour trading could be extending the currently approved trading hours. For Polish clients, an earlier start of trading could be particularly valuable, as today, the American exchange starts at 9:30 AM New York time, which is 4:30 PM in Poland.
There is also another interesting aspect related to the duration of stock trading hours, called the “overnight effect.” It turns out that the vast majority of returns from the S&P 500 index occur at night, not during standard daytime trading. This happens because most company financial results and some macroeconomic data are published outside trading hours. This “night effect” is also visible in other major markets, from Canada to Hong Kong. It seems particularly strong in the case of assets mostly owned by individual investors. Night trading is usually less liquid and more volatile than daytime sessions, making the replication of the “overnight effect” difficult and associated with higher trading costs. This led to the rapid closure of the ETF (NSPY) created precisely to replicate it. However, overnight trading provides an opportunity to react to results outside working hours, such as the recent results of Tesla or Nvidia, as well as reports from the US economy.
Paweł Majtkowski, eToro analyst in Poland
