EU stock exchanges spurn shorter trading hours
Shortening current trading hours across Europe would be “a move in the wrong direction and detrimental to European markets,” said the federation of European securities exchanges (FESE) on Wednesday, replying to the debate on trading hours for equity markets sparked by the Association Association for Financial Markets in Europe (AFME) and the Investment Association (IA) in November 2019. The associations had proposed a reduction of 90 minutes, from eight and a half hours to six hours, with the aim of increasing efficiency and diversity on the trading floor. The letter, that was sent out to main European stock exchange operators, suggested changes in hours from the existing 8 am – 4.30 pm to 9 am to 4 pm GMT (9am - 5.30pm, to 10am - 5pm CET).
A majority of respondents to London Stock Exchange Group's consultation over the matter had already expressed a preference for a 09:00-16:00 trading day. Notwithstanding LSEG was awaiting findings from other European exchanges before amending its trading hours. The FESE opposed a clear no to a reduction in trading hours, arguing that current ones “best serve” investors’ interest. “This a complex issue that warrants serious reflection in terms of the competitiveness of Europe, market quality, depth of liquidity, the participation of investors in the market whilst also recognising the need to ensure the well-being of employees,” the federation pinpointed.
Liquidity and price formation under threat
In FESE’s view, trimming trading hours would put liquidity under threat on European regulated markets. It outlined that current trading hours in Europe enable investors to manage their positions and risks over the day in very liquid, transparent and efficient central limit order books. “The amount of liquidity present on European markets in the early trading hours and during the latter part of the afternoon demonstrates that the length of the trading day currently reflects investors’ needs,” FESE said. A shortening of the trading day would also impact price formation according to the federation. Said the European securities exchanges’ representative body, the number of trades made outside of exchange markets - on systematic internalisers and OTC markets - would increase, thus further facilitating an “unlevel playing field.”
“This could, in turn, restrict the exchanges’ ability to act as a reference market and drive even more flow away from transparent markets which is something legislators already accept as an unintended outcome of MiFID II and are seeking to remedy in further amendments to the legislation. In such a scenario, investors would face both stale prices (no price formation) and higher costs (retail clients, for example, are exposed to wider spreads during markets’ off-hours) for longer periods,” FESE explained. The federation argued that flow diversity would be harmed too as a result of less interaction between retail and institutional flow. AFME had argued that currently 54% of trading on Euronext markets was taking place within the last two and a half hours of trading (16.30-17.35), nearly a quarter of which is trading in the final five-minute closing auction.
Europe could lose a competitive advantage
FESE similarly turned down AFME and IA’s comparison with US and Asian equity markets whose trading days last for six and a half hours and six hours respectively. It recalled that some markets in Europe offer longer trading hours to allow for interaction with markets in other jurisdictions. “One of Europe’s advantages in this regard is that it is uniquely situated to span both the Asian close and the US open. The reduction of trading hours in Europe would have an impact on this unique status and potentially offer competitive advantages to other jurisdictions to expand their trading hours to compensate for this new gap between market close in Asia and market opening in Europe. Such a decision would place European markets at a competitive disadvantage,” FESE stated.
The length of the trading day does not have a negative impact on the working culture of trading.
Federation of European Securities Exchanges
Besides, the federation highlighted current divergent trading hours across European exchanges and that this was stemming from regional specificities and investor preferences. “Trading hours need to be able to reflect these differences and accommodate local habits, time zones, retail activity and historical solutions with the aim of maintaining liquidity distributions. Due to the demand of end investors to trade longer (and some FinTechs intending to move to a 24/7 ability to trade financial assets) we have seen an extension of evening trading hours in several local markets,” said FESE.
As to concerns around mental health and well-being of trading floor workers, FESE asserted that the length of the trading day “does not have a negative impact on the working culture of trading.” It added: “The claims of better work-life balance are based on the premise that narrowing the time frame in which stocks are traded on regulated markets would open the door to a better work-life balance in the industry. Exchanges would reject this premise and note that other measures would need to be deployed at an enterprise level to improve the well-being of employees.”