Cryptocurrency markets trade 24 hours a day, seven days a week, which has led to discussions on whether other financial markets, including the cleared derivatives markets, will move in the same direction.
Proponents say moving to extended trading hours in the futures and options markets would align with the needs of global, interconnected markets where the news cycle is 24/7 in nature. Continuous trading would allow investors worldwide to manage risk in a real-time manner and engage with the markets at times convenient to them.
Such a move, however, would require significant adjustments in how market infrastructures, such as exchanges and clearinghouses, run their businesses, and even more so for intermediaries like brokers and clearing firms that handle customer orders. Equally important, market regulators are weighing the implications for how they would oversee markets and protect investors.
The Commodity Futures Trading Commission, the main regulator of futures markets in the US, is at the forefront of this trend. The explosion of interest in futures on bitcoin has put a spotlight on the 24/7 nature of trading in the unregulated offshore cryptocurrency markets. To have a better understanding of this issue, the CFTC’s Division of Clearing and Risk held a roundtable on 24/7 trading on 16 October with a range of market participants.
JB Mackenzie, general manager for futures and international markets at retail broker Robinhood Markets, told the CFTC that he is seeing a clear demand for round-the-clock trading from retail traders.
“Client demand for 24-hour, seven-days-a-week trading is already there – no question. World events don’t stop because we’re closing our marketplace,” Mackenzie said. “I do think there are questions and concerns around infrastructure getting to the point of being able to support 24-hour trading, but it’s something that we’re going to have to do. If not, other markets are going to evolve that might be unregulated,” he added.
“Our markets are going to have to evolve, but they won’t get there overnight. It has to be in baby steps. If we don’t start moving towards 24/7, other markets are going to get there first.”
Not just retail
It is not just retail traders who have an interest in trading during extended hours. Physical hedgers could also benefit, said Dave Olsen, president and chief investment officer at Jump Trading Group, at the CFTC event.
“Geopolitical events and the price of natural resources is an obvious opportunity for those who are user participants to manage their inventory and their production risk. We’ve seen hurricanes strengthen from category one to category five in 12 hours. If you have orange groves in Florida, having the ability to hedge your position while that is unfolding over a weekend instead of waiting 72 or 96 hours to go back into the market to hedge your crops could be beneficial to end-user participants,” he said.
Speaking on a panel at FIA Expo in November, Jeff Arnold, chief operations officer at ABN AMRO Clearing USA, said the asset classes that are seeing the greatest demand for 24/7 trading include the equities and commodities markets.
“In the equities markets, they are already talking about 22 hours, five-day trading. That’s going to happen, and it will be seven-day trading eventually. Also, the oil markets and big commodities, and as these come, the derivative products that are based on these, will start to follow,” he said.
“It’s not an all or none, however. When we talk about 24/7 trading, we’re not just flipping a switch and all markets for all things go live. It will be the highest volume, most liquid markets that will be available to clients, and then client demand will follow. As one product becomes profitable, the next product will come along,” he said.
But is it worth it?
Market participants have highlighted several concerns about a shift to 24/7 markets, citing technological demands, which would be immense, and questioning whether derivatives clearing infrastructure is ready for such a shift.
Those concerns came to the fore during FIA Expo, the futures and options industry’s largest annual conference. The programme included a panel discussion dedicated to exploring both the commercial opportunities and the operational challenges inherent in a move to 24/7 trading.
“A big consideration is what do we mean by 24/7 trading?” asked Francesco Margini, chief product officer, cleared derivatives at ION, one of the main technology vendors for trading futures and options. “Do we mean extending trading and clearing to include a weekend, or do we mean having no downtime whatsoever throughout the year? The latter would entail significant technical challenges and the introduction of a new kind of operating model”.
For established firms, a shift will require overhauling existing processes and systems, particularly those that rely on downtime to carry out maintenance. Typically, firms use weekends and evenings to perform upgrades to their infrastructure, operating systems and core applications.
“You bring the systems down, make the changes and then you go online again. If you narrow that window, or you remove that window altogether, you will need to implement a new operating model where trading and clearing environments are replicated in real-time to an alternative site. Then you can flip over seamlessly to do the changes you have to do on the primary site,” Margini said. “Technically, this can be done, but there would be investments and costs associated with the additional infrastructure and environments that you need to operate, which adds to the cost that the industry already bears today for resilience, which is very significant.”
Speaking on the same panel, Helen Fermor, the chief operating officer of ICE Clear US, said the Intercontinental Exchange group already offers contracts that trade and clear 22 hours a day, but making the jump to 24-hour trading, seven days a week could take some time.
“We have a lot of contracts that are trading and clearing 22 hours a day, five days a week, which means we are already processing a lot of trades outside of standard business hours,” Fermor said. “From a technology perspective, going to a Saturday or Sunday might not be a huge concern, but where there would be a technology lift is in that two-hour window when we do all our end-of-day processing and our technology releases. That jump to 24 hours would be quite big.”
Logistics and basic staffing could also prove to be a thorny issue. Firms would need to ensure they have the right coverage in place, and finding suitable risk managers and traders willing to work unsociable hours could take time.
Risks and costs
Extending trading hours could also bring practical challenges to the post-trade process. Clearinghouses and clearing members have expressed concern about infrastructure readiness, particularly relating to collateral movement and settlement, and the potential for increased market risks.
“There’s a disconnect between when you can trade and when you can settle, and it’s difficult to fully support 24/7 trading environments when we all know that the collateral cannot move at that speed,” said Allison Lurton, FIA’s general counsel and chief legal officer, speaking at the CFTC roundtable. “Specifically, it is either the DCOs [derivatives clearing organisations] or the FCMs [futures commission merchants] that are going to bear the risk of that gap.”
Joe Guignan, chairman and chief executive of clearing firm Advantage Futures, agreed, adding that there could be considerable additional costs and risks.
“If the trading week increases by 40% there is going to be a significant cost to every FCM. You are going to need 24/7 risk management people monitoring client positions. The illiquidity in the market will likely be profound at different times in different products, and that can lead to FCMs being forced to try to exit client positions because of a move in an illiquid market,” he said. “It exposes the FCM community to a lot more risks. Sometimes there are liquidity problems in the overnight markets, and those will only increase if you go to 24/7.”
In fact, there are concerns about illiquidity even within the current trading day. In Europe and the UK, some markets have gone as far as to consider reducing trading hours in an effort to concentrate liquidity.
As part of their response to a 2020 LSEG consultation on reducing trading hours, the Investment Association and the Association for Financial Markets in Europe argued that a shorter trading day would actually improve liquidity in Europe. “Rather than being thinly spread over an extended period of time, trades would be more evenly distributed over a shorter trading day,” the two associations argued.
Speaking on the CFTC roundtable discussion, Demetri Karousos, president of Nodal Clear, a clearinghouse in the US electricity markets, said he supports 24/7 trading and clearing but stressed that firms would need to have certain risk management practices in place.
“One of them is a very robust pre-trade risk regime that prevents any addition of risk beyond what the clearing member or the clearinghouse is comfortable with,” he said.
“There should also be the ability to track existing orders that have not yet hit but are still live. The check needs to be a full portfolio check, not just the electronic trading that day, and this would require real-time position monitoring. This is critical for proper risk management during the weekend when you don’t have frequent cash flows from a normal margin cycle. It’s also important to allow current mark-to-market exposure to reduce trading capacity during a longer period like a weekend.”
On the other hand, moving to 24/7 trading could have some benefits for risk management by allowing market participants to adjust their positions over the weekend, Karousos said.
“You would have the ability to pick up the phone and call your trader, or, in the case of the clearinghouse, call your clearing member and say, ‘Hey, you’re getting a little long here, or you’re getting a little short here. Could you reduce your exposure?’ and you can do that over the weekend in a measured, thoughtful manner, which you can’t do today. Weekend trading would actually allow for risk diminution.”
Incremental steps
Momentum in 24/7 trading is building, but incremental steps must be taken to reach the final destination, market participants say.
“We know the endgame here,” said Jump Trading’s Olsen. “Markets will be trading 24/7 in the not-too-distant future. We are trading 24/7 today. A lot of Middle Eastern markets are open on the weekend. India has Sunday sessions that spring up from time to time. The risks don’t go away on Saturday and Sunday, and those participating in the market are interacting with those today, but in other markets that perhaps are less regulated.”
Olsen called for a measured approach from the CFTC in moving forward on the idea of creating a framework in the US to allow round-the-clock trading.
“What I would suggest is that, under the purview of the CFTC, we pick a pilot market so it’s not a big bang, where everybody has to be ready and the entire global infrastructure needs to be set. Instead, you allow trading of one contract complex as a test case,” Olsen said. “The participants have breakout meetings, we talk about the design of collateral movement, whether or not there has to be pre-funding – I think that can be a good idea – and start moving forward in the US to catch up with a lot of where the global market is.”
Another area of focus could be on tokenisation. Speaking at FIA Expo, CFTC acting chair Caroline Pham said a subcommittee of the CFTC’s Global Markets Advisory Committee had reviewed the possibility of extending the use of distributed ledger technology into collateral management. This technology could be used to allow clients and clearing firms to move collateral and meet margin calls 24/7.
“We have been looking at the opportunities that blockchain technology could provide to enable 24/7 trading and instant settlement and clearing,” Pham said. “You need a solution for the cash line as banks don’t work 24/7. Until there is a suitable bearer instrument that can move at that 24/7 pace, it’s going to be very challenging to enable 24/7 trading.”
Moving to continuous trading could be a monumental shift for cleared derivatives markets. However, for now, there are plenty of obstacles to overcome before access to round-the-clock trading becomes a mainstream reality.
