Optiver strongly supports the Federation of European Exchanges’ view that the shortening of the European trading day would be detrimental to European markets and end investors. The recent reviews of financial market hours across European exchanges, have revolved around minimising hours as much as possible, while maintaining current trading volumes. It is Optiver’s view that this objective misses an opportunity for the European Capital Markets Union to become a truly global centre of equity financing and secondary trading.
Europe has a unique geographical advantage that allows it to bridge Asian and American business hours and therefore markets. With the continued growth of Asian markets in mind, now is the time to take a long-term view and lengthen European trading hours to create an overlap with Asian business hours and lengthen the overlap with American hours.
Expanding trading hours will also facilitate additional retail engagement within Europe, further capitalising on the European CMU’s unique differentiator.
Proposed adjustment to European trading hours
In recent months there has been significant discussion within the European capital markets industry around trading hours, with a call to re-evaluate European exchanges’ opening hours to ensure they are optimised for current market realities. As Optiver, we welcome dialogue that leads to the improvement of the market and ensures it remains fair, transparent, healthy, active and liquid.
With over 30 years’ experience in market making and a global footprint, Optiver has extensive experience trading on exchanges with varying market hours and models. Healthy, active markets with a range of engaged parties, benefit society as a whole as they facilitate more efficient capital allocation and lower the costs of raising funds and investing.
Some parties have suggested shortening European market hours, highlighting that exchanges in other regions are able to handle similar trading volumes to Europe in shorter hours. Optiver disagrees with this view, as we strongly believe that it would be detrimental to European capital markets, especially if the critical overlap period with North American markets was lost. Such a move would exacerbate the already declining global competitiveness of Europe and further reduce the relevance of its capital markets (see tables below), during a period when the region can least afford it.
Re-evaluating European trading hours is an opportunity to better leverage Europe’s key differentiator – its geographical location. Europe has the unique advantage of being able to bridge business hours between APAC and North America. Instead of shortening trading hours, we propose that European exchanges open earlier and close later while introducing a lunch break in the middle. This would increase global interest in European Capital Markets which will have significant positive consequences for the region and at the same time stimulate local retail interest in real capital markets.
Above tables show historical notional traded volumes of index futures and options in US/EU/APAC regions.
Note the dramatic growth in volumes in the US and APAC with no growth – and in many cases decline – in traded notional across Europe since 2008. NB Due to major market structure shifts and in transparency of data a similar chart cannot be created for equity markets directly but Index Futures serve a very reasonable proxy.
Optiver notes that this decline in volumes goes hand in hand with a decline in overall liquidity and relevance of the European Capital Markets Union and urges swift action to increase global relevance of European Capital Markets – of which optimized market hours is one important facet.
European capital markets union
The entire European Capital Markets Union and in turn, European economies, stand to benefit from fully leveraging Europe’s geographical advantage. The likely outcomes are directly aligned with the goals of the European Capital Markets Union initiative, in particular the goals to:
- facilitate cross-border investing and attract more foreign investment into the EU
- reduce the cost of raising capital
- provide new sources of funding for businesses, especially for small and medium-sized enterprises
- increase options for savers across the EU
Europe is uniquely positioned as a bridge between Asian and North American markets and should leverage this geographical advantage as much as possible. To do this, we propose extending trading hours of European equity exchanges to create a true overlap with Asian exchange trading hours.
It is undisputed that the current overlap with US markets is critical for liquidity on both sides of the Atlantic. A true overlap between the equities markets in APAC and Europe, which currently does not exist (see table below), would contribute to morning liquidity in European markets in the same way as the overlap period with the US markets currently contributes to afternoon liquidity.
As China continues to open to the world and other APAC economies further emerge, bringing their huge populations into the global middle class, it is inevitable that the significance of APAC capital markets will increase. This makes the long-term case for a true overlap between APAC and European market hours as valid as the current EU-US overlap.
Fully leveraging Europe’s geographical position will have the dual benefit of increasing interest in European markets and securities from both Asian and American investors, while making European markets attractive as the go-to trading venue for Asian investors looking to trade global equities.
A concrete example could be to open at 07:00 CET maintain the official close at 17:30 CET and add an additional retail-focused evening session between 18:00, with a close at 22:00 CET. To minimize the total additional hours in such a scenario we propose introducing an intra-day market pause between 11:00 and 14:00 CET. However, this is simply an example; Optiver looks forward to further discussion around the ideal hours which would achieve the goal of making the European CMU a truly global centre for equity financing and secondary trading.
Here is a table of the opening times of major derivatives and equities exchanges worldwide, including Optiver’s proposed opening times for European Equities exchanges at the bottom. We also include a relative measure of equities volume across the regions. Notice the current lack of overlap with major APAC equities exchanges and the relatively low level of activity during the middle of the EU day.
Extending equity trading hours in Europe would not only be in line with industry trends (see global trends side-bar), and facilitate Asian interest, but also stimulate interest from European retail traders who wish to trade on their own time.
Competing products that are open with longer trading hours already exist. These products include other asset classes such as FX, commodities, and crypto currencies, along with look-alike products like turbos, sprinters, and CFDs. Many retail investors who want to trade actively – especially those who wish to do so outside of office hours – currently turn to these products due to their availability during the desired hours.
Additionally, retail-focused equity exchanges already trade with longer trading hours. For example, Borsa Italiana offers a retail-focused after-hours segment and regional German exchanges open earlier and close later than traditional European equities exchanges. These exchanges are closely connected to retail brokerages and thus good indicators of retail interest. We believe that these exchanges have chosen to operate these hours for good business reasons and call upon other exchanges to follow suit.
Finally, we believe that financial markets should be made more accessible to retail investors in general. Europe already suffers from a significant lack of local interest in financial markets relative to APAC or North America. Markets being open later into the evening can only help to increase the potential for retail investors to be active in the real financial markets instead of look-alike products.
Impact on Employee Wellbeing and the EU CMU
The overall societal benefits of strengthening and increasing competitiveness of the EU Capital Markets Union should not be underestimated when weighing the balance of potentially increased working hours in the industry. If Europe were to become more relevant to global participants it could further leverage its position as the leading region for ESG concerns and be better placed to affect positive change globally.
The potential downsides of an extension of market hours, such the impact on the well-being of some people working in the financial industry, can be mitigated through the adoption of a midday market pause. Such a break lends itself to part-time or shift work, which would improve the overall work/life balance of traders and could also result in additional employment opportunities. Such a lunch break would also allow for off-desk meetings to take place during the day or could be used for wellness breaks.
Impact on related derivatives products
Increasing European trading hours as proposed would have relatively little impact on equity index futures markets, which are already open for far longer than the underlying equity markets (nowadays approaching 24/5 trading – see this table) and in fact are normally the ‘leading’ instruments for equity markets and self-sufficient in terms of price discovery and liquidity.
Unlike index futures and options, single stock options and futures remain lagging products relative to the cash equity markets. Meaningful liquidity and volumes in these instruments only exist when the underlying shares are also open for trading. If the underlying equities markets’ trading hours are adjusted, the corresponding equity options and single stock futures markets should also be adjusted accordingly. We therefore propose for equity options to be closed during the suggested midday equity market pause.
A midday equity market pause would have an impact on the timings of some derivative settlement prices. Additionally, many corporate earnings are currently released around 8:00 CET, which would become part of the equity trading session. Therefore, we do recognise that further discussion on alternatives is necessary if a lunch break is introduced.
Impact on settlement cycles
Extended hours do not need to impact official close/settlement prices or timing of post trade processes. The outsized importance of the closing auctions and the settlement price on many related parts of the financial industry is clear and any changes would have wide-reaching operational impacts. Retaining the current official closing time of European equity markets while implementing a distinct evening trading session would therefore be sensible. The evening session could be a ‘T+1’ session to also reduce the impact on transaction settlement cycles.
This segment solution is already utilised in many of the ‘24/5’ derivatives exchanges. It would also allow for firms to opt out of the extended sessions if desired. Modern technologies can also allow for increased scale and coverage of longer market hours without excessive costs.
We realise that these factors would be impactful and further industry engagement on relevant adjustments would therefore be recommended.
Coordination across exchanges
Much of the discussion around potential changes to market hours has called on all exchanges to act in concert to affect any changes. Although alignment across exchanges would be ideal, it is not a pre-requisite. Achieving consensus across all stakeholders within Europe would be extremely challenging and likely lead to a default to retain the status quo.
We note the status quo is already somewhat un-coordinated, with markets operating with different open and close and (midday) auction timings, not to mention holiday closures. Market hours should be a business decision for individual exchange operators and their stakeholders. Innovation on market hours should not be limited by forced industry cooperation.
While regional exchanges have already shown positive ‘proof of concepts’ for our proposed ideas, if a major European exchange were to implement these changes and show success, we expect others would follow suit, resulting in a natural re-alignment and coordination over time.
Europe is missing a great opportunity to capitalise on its uniquely advantageous geographical location by not opening its exchanges in a way that maximises overlap with APAC and North American markets.
We believe that this geographical advantage should be maximised by extending the opening hours of European equity exchanges. One scenario is to begin trading at 07:00 CET and close at 17:30. An additional evening session could begin again at 18:00 with a close at 22:00 CET. To manage the impact these extended hours would have on staff and operations we propose a market pause from 11:00 – 14:00 CET.
These proposed market hours would cement the European Capital Markets Union as the go-to location for global equities trading, increase retail participation in European equities markets and match global trends. The costs of these changes will be well worth it, when considering the benefits, it would have for European markets.