Until this morning I had never thought to ask this question; 9-4 is simply the time when stocks are traded. But really, what’s stopping us from interacting with the market during the other 17.5 hours of the day? The NASDAQ is almost entirely an automated exchange, and even the NYSE, known for its iconic opening bell and trading floor, is largely traded electronically nowadays. Clearly we have the technology for 24/7 trading, right?
In my search to answer this question, I came across several key reasons as to why the current trading hours are the way they are.
The Boring Answer: Logistics
One of the main factors at play here is that running the stock market is simply a lot of work. Having down time allows time for things like bookkeeping, calculations, and trade reconciliations, which would be difficult to keep track of if the market was constantly active.
Time and Tradition
The NYSE’s bell ringing ceremony has been around in one form or another since the 1870s. During the 19th century, the exchange was opened with a Chinese gong instead of the traditional brass bells, which were introduced in 1903. Ringing the bell is considered a great honor nowadays; many high ranking officials and corporate leaders, as well as Darth Vader and Snoop Dogg, have been asked to participate in the ceremony.
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In more practical terms, the opening and closing times have changed little since the 1880s; the most significant adjustment since that time has been to change the opening time from 10:00 am to 9:30, which happened in 1985. The NYSE attempted to push the opening even earlier – to 9:00 am – in 1991, but was met with sharp resistance from companies and investors out west. 9:30 to 9:00 might not be a big deal for New Yorkers, but it would surely be a nuisance for investors in California for whom the market already opens at 6:30 am. Dale Carlson summarized the issue nicely back in 1991: “the NYSE plan would have increased working hours and costs without a comparable increase in trading volume and revenues” (philly.com). In addition to various logistical concerns, the trading schedule we know today is held in place largely by resistance to change.
Liquidity vs. Price Discovery
Perhaps the most important factor underlying all others is the balance between liquidity and price discovery that must exist within an exchange. The best way to understand this is by flipping our original question on its head: instead of asking “why isn’t the market open all day,” we might ask why the market is open for six and and half whole hours instead of, say, one.
At its core, the stock market operates by matching buyers with sellers. In theory, this could be accomplished in a single hour or even at a single set time. Matching everybody’s orders (I want to buy X stock for Y amount of money, you want to sell X stock for Z amount of money) does not necessarily require an open and fluid market in order to work.
But we can answer this new question simply enough, by saying that those 6.5 hours provide traders with liquidity. Keeping the market open for this extended period allows us to buy and sell stocks at relatively stable prices; for instance, today I could buy a share of Apple for approximately $95. I know this because Apple has been trading between $94 and $96 for the past three hours. However, if today’s 6.5 hour trading period were to be reduced to a single point in which all trades are processed simultaneously (or almost simultaneously), the price of an Apple share may be subject to some fairly drastic jumps depending on that day’s trading outcomes.
Conversely, this is also the reason why the market can’t be (or isn’t) open 24/7. In contrast with the condensed “trading point” that we imagined earlier, the 24/7 market would spread our trading activity far too thin. Sure, everyone would be able to trade on their own time, but the relative scarcity of trading volume would make stock prices difficult to pin down. If nobody is buying Apple shares at 2:00 am, for instance, how can I know what price to expect when I decide to sell my shares?
Conclusion: A Continuous Auction
This is, of course, a very simplified explanation of the issue. The best way to summarize it is that the NYSE operates like a continuous auction. During trading hours, everything is always up for bidding. Like any auction, the stock exchange requires three parties in order to function: buyers, sellers, and an auctioneer. The auctioneer, or in this case, the entire workforce behind the NYSE, does not want to run the auction 24/7. Likewise, there is no way to guarantee that people will want to buy or sell things at this auction at all hours of the day (realistically, they probably don’t want to participate at most hours). In short, to change the current trading hours from 6.5 to 24 would require some pretty drastic changes in the way the NYSE operates and in the daily schedules of its traders.
- Connor
