By Phil Mackintosh, Chief Economist, Nasdaq
We’ve covered retail growth over the past two years, how retail trades, how and what stocks retail likes to trade. Today we look when retail businesses.
Retail is an early bird
Given How? ‘Or’ What retail trades, we can estimate what time retail investors are trading by looking at the sub-decimal strip imprints (SIPs). To understand why looking at sub-decimal transactions primarily captures retail transactions, read our previous studies here and here.
In addition to wholesalers, some exchanges have approved retail programs that also allow them to execute at sub-decimal prices. Anyone is allowed to provide liquidity to these programs, but only the retail trade is allowed to take advantage of these price-enhancing displayed quotes.
When we aggregate a month’s data into 15-minute increments throughout the day, we find that retail trades differ from those of the broader market, as they trade significantly more in the morning and almost none in the morning. the fence (Chart 1 ).
It is also important to note that many exchanges are open for trading from 4:00 a.m. to 8:00 p.m., although official “market hours” are 9:30 a.m. to 4:00 p.m. This allows investors to still match trades after hours, which often happens when a stock releases earnings or other news late, or alongside economic news that is often released in the morning.
Finally, the data in Chart 1 (green line) shows off-exchange retail peaks at 8am. However, this is because the TRF starts at 8 a.m., so all off-exchange trades made in the previous 12 hours are printed on the tape in a group at 8 a.m. Retail Schedules Exchange also need market makers to be active, so they also tend to start later. For example, the Nasdaq BX RPI program starts at 8 a.m.
Chart 1: Retail VWAP curves show more transactions in the morning
Institutions negotiate later
In contrast, the rest of the market makes a significant portion of its daily trading volume closer and at the close. In fact, from 3:45 p.m. until close, we see about 14.1% of all volume traded, even though it represents less than 4% of the trading day.
This is partly because index providers calculate benchmark performance daily, using closing prices. These prices are used to measure the portfolio performance of professional investors, as well as to calculate the unit prices of mutual fund cash flows.
This means that things are close to the performance of the portfolio. So even stock-picking mutual funds sometimes need to invest as close to closing prices as possible, especially with large cash flows. Index funds, which have the least tolerance for missing their benchmark, execute even more of their trades at the closing auction. In fact, making all trades at the close will perfectly match trades and cash flows to index movement prices, eliminating the risk of trade timing leading to underperformance and tracking error. in the fund.
However, as we’ve shown earlier, it’s not just index funds that trade at the close. The data suggests that index funds are typically only a fraction of the daily close.
Exchange programs work best outside of continuous trading
The data also shows that retail is trading outside of “market hours,” but not that much. In fact, the total pre-market and post-market trades represent only 3.6% of their overall traded volume.
Looking at sub-decimal SIP trades on the TRF and retail exchange programs separately, we find that retail investors prefer very early morning retail exchange programs. However, once the official trading day has started and a protected NBBO is available to calculate EQ metrics, wholesalers quickly gain market share.
Outside normal market hours, spreads are much wider
Encouraging market makers to make competitive quotes is an important function of exchanges.
Not only is trading activity concentrated during official market hours, but we also find that pricing is much more competitive during this time. In fact, data shows that spreads widen significantly outside of official market hours.
On a value-weighted basis, after-hours quotes are more than 10 times wider. However, that’s partly because a lot of market-moving news happens outside of market hours. Most profits are released after the close, and when this happens these tickers are trading the most value with lots of price discovery – leading to wider spreads – skewing this result. Many important economic data in the United States are also released before the markets open, which also adds to market maker risks, given the low liquidity available for hedging. And of course, market-moving international news happens just as often while US markets are closed.
For a retail investor, it is therefore much more important to use limit orders based on the prices you think are fair given the news available.
Chart 2: Spreads compress significantly during official market hours
Source: Nasdaq Economic Research
What does all this mean?
In short: compared to other investors, retailers trade early, even before markets open.
The data also shows that outside of market hours, when trade quality and execution (605) rules are not in effect, having a competitive listing on an exchange is also important. Interestingly, during normal market hours when spreads are tighter, activity seems to shift towards wholesalers.
It also seems to show both the importance of competitive quotes and the fact that retail brokers change routing throughout the day to ensure they get the best possible prices for their clients.
