There are a lot of big changs that might change how stocks trade in the future — from 24-hour trading to AI and tokenization.
Over the past year, major exchanges, including Nasdaq, the New York Stock Exchange, Cboe (in the U.S.) and the London Stock Exchange have all announced plans to extend the equity trading hours toward 24 hours a day. Clearing and settlement (DTCC) and the Consolidated Tape (SIP) will also need to be upgraded.
Today we’re going to look at what research says about how overnight trading works now. The data points might help us work out how 24-hour trading should work.
Not a lot of data on extended-hours trading
One problem with understanding how extended-hours trading works is there is not a lot of data on it.
To start, extended-hours trading accounts for about 11% of total daily volume. As the volume curves in Chart 1 show, most of extended-hours trading occurs in the hours right before and after regular hours trading. Overnight trading (8 p.m. to 4 a.m.) accounts for only 0.2% of the total equity market volume.
Chart 1: Volumes across the 24-hour day, and the proportion of on and off-exchange
We already talked about what is the best time to actually “end the day,” based on the fact that some Asian markets open before midnight in the U.S. Chart 1 shows that that not only is there (a lot) less liquidity after hours, but a lot of it is also traded in off-exchange trading – although there is still on-exchange trading when exchanges are open (from 4 a.m. to 8 p.m.).
Why do we care about extended-hours trading?
Importantly, the rules of trading are also different. There is no NBBO and no OPR (order protection rule). That means “trade-throughs,” or fills at worse prices than exchange prices, are allowed and there is no 605 reporting to account for how much trade-throughs cost investors.
Market volatility trading bands (like LULD and Market-Wide Circuit Breakers) are also not available to protect investors. In fact, the SIP isn’t even open from 8 p.m. to 4 a.m., making it impossible to report trades during those times.
Looking at the research that has been done
Recently, a number of research papers have been done by academics, looking at overnight and extended-hours trading. Today, we focus on what those academics have found.
The academics consistently suggest that overnight trading is primarily used by retail investors, and they pay much higher trading costs overnight. Many studies indicate that retail investors still need help guaranteeing low execution costs and good trade prices, especially when exchanges don’t provide competitive quotes to protect the market.
1. Most overnight volume comes from retail investors in the Asian region
We know that earnings, and some economic data, are typically announced just outside of regular market hours. That news creates some additional trading, most likely from professional investors. That’s consistent with a 2003 paper by Barclay and Hendershott. It also likely explains the elevated trading near the open and the close in Chart 1, but not the trading after most in the U.S. have gone to sleep.
A recent study suggests that the trading while the SIP is closed (8 p.m. to 4 a.m.), also sometimes called overnight trading, is dominated by retail investors. The study’s data source suggests that 80% of the volume comes from the Asian-Pacific region, with around half of that originating in Korea. The rest — just 20% — primarily comes from U.S. retail investors.
Chart 2: Makeup of overnight trading participants
2. Market quality is notably worse when exchanges are not quoting
We have shown in the past how the use of rebates to incentivize competitive NBBO quotes helps narrow the spread during regular trading hours.
However, overnight trading operates fundamentally differently from regular hour trading. Currently, no exchanges operate overnight. Instead, trading occurs off-exchange (as Chart 1 shows). With less exchange trading and less competition for lit quotes, we see that spreads widen after-hours.
The research from the recent study shows that stocks that:
- Trade overnight every day: Only 393 stocks traded every day during their sample period. For those:
- The quoted spread was around 40% higher during overnight.
- The depth was only 47% of the regular hours.
- Stocks trade overnight: Only 3,026 stocks traded at all during their sample period.
- The quoted spread on was around 144% higher during overnight.
- Interestingly, on average for all stocks, depth is comparable to that during regular hours.
Chart 3a: Depth and spreads are worse overnight
With overnight spread wider and depth lower, most traders would expect trading costs to be higher. In fact, that’s exactly what this study found. Effective spreads on retail orders were around 3 times the size of those executed during regular hours, and price impact was around 6 times larger.
Chart 3b: Overnight trading cost is much higher
3. Lack of OPR and 605 might add to overnight execution costs
Another paper by Hendershott and Barclay (2003) shows that extended-hour trading (4 p.m. – 9:30 a.m.) cost is 4-5 times larger than regular hours. That compares to the Werner, Eaton and Shkilko (2025) paper above which found that overnight trading (8 p.m. – 4 a.m.) was 3-6 times.
Interestingly, the study by Werner also found the majority of overnight executions happen at or worse than the best quoted price – and there are almost no orders with price improvement.
Chart 4: Overnight orders “trade through” exchange quotes
4. Liquidity providers maximize spread capture – adding cost to retail orders
During the day, the combination of the Order Protection Rule (OPR), Execution Quality (605) reports and competition help to protect retail investors. During extended hours, none is in force.
Sometimes, in order to protect retail customers from their market orders trading through a thin market, and increasing their execution costs, orders are automatically converted to limit orders.
A study out of the University of Cincinnati noticed that, between 2018 and 2022, this practice may have actually increased retail trading costs. The data shows executions “clustered” close to the 5% limit (Chart 4) during extended hours. Then, as soon as the practice stopped (at 6 p.m.) the effective spreads reported no longer clustered right below 5%.
The academics argued that this indicated that sophisticated traders adapted their algorithms to maximize spread capture from this automatic collaring.
Chart 5: Sophisticated investors profit from retail investors
Some studies suggest shorter hours might improve market quality
Not all studies suggest longer hours are better.
Another study looked at European trading. It suggested that their “longer” trading day (typically 8.5 hours compared to 6.5 hours in the U.S.) might actually be harming market quality and adding to execution costs.
They use the times when the U.S. and Europe daylight savings changes create a stronger overlap of hours. They show that European markets have better spreads and depth when the markets overlap. In short, the authors argue that shortening the European day (specifically opening closer to U.S. hours) would concentrate liquidity better in the European opening and improve the market quality.
Investor protection, and rewarding lit quotes, is still important
Perhaps what these studies show best of all is the value that exchanges and lit quotes provide to the market. Sure, with less liquidity after hours, spreads are likely to be wider. But this data shows that trading at times when there is no OPR, NBBO or 605 requirements might also make some retail trading costs unnecessarily higher.
This, in turn, shows the importance of having competitive lit quotes. Although as the European study also shows, getting market makers to compete over a longer timeframe might also be a challenge.
Shiyun Song, Economic Research Principal at Nasdaq, contributed to this article.