Everything from increased volatility to increased fidelity has been threatened if the US stock markets stay open late. They may not be scared of the dark, but the prospect of trading deep into the night should worry investment professionals. If trading does go on into the night, can brokers, analysts and money managers go off for a quick round of golf or a few drinks secure in the knowledge that their stocks are safe? If not, because they are all still working, you can be sure they’ll be calling investor relations departments to share their pain and maintain information flow.
This summer, the heads of the Securities and Exchange Commission, the National Association of Securities Dealers and the New York Stock Exchange all reviewed plans for a late trading session, probably between 5.30 pm and 9 pm. Radical and ambitious plans had been declared for trading to enter the twilight zone as early as July 1 and study groups were set up, but the Nasdaq-Amex Group’s Frank Zarb and the NYSE’s Richard Grasso both promised that the closing bell would carry on ringing at the usual time, at least up until the New Year. In fact, industry insiders have suggested that Grasso withdrew the idea when the NYSE’s member firms raised a rumpus – they were nowhere near ready for the increased demands on staffing.
Despite the delay, Niri’s Lou Thompson warns, ‘It’s coming and there is no way that we can stand in the middle of the track and stop that freight train coming down.’ He also sees staffing as the most crucial issue for investor relations professionals, and he adds that this is not only because of the prospect of an evening shift for investor relations departments, but also because of the shift in emphasis of the work as new investors increasingly begin to go online to trade.
Meanwhile, however, a lot of market players are not waiting for the New York Stock Exchange and Nasdaq to launch late shifts before going ahead with their own plans. MarketXT has recently launched a 6-8 pm session for customers of the big Wall Street brokerages to trade in the 200 largest stocks listed on Nasdaq and the NYSE. Meanwhile, the Chicago Stock Exchange is also planning to extend its trading hours to 6.30 pm EDT, possibly as soon as this month.
The most significant development for individual investors is a deal inked between E-Trade and Instinet, the grand-daddy of alternative trading systems owned by Reuters, which would allow individual investors to trade on Instinet up until 6.30 pm. Nasdaq-Amex quickly responded to all the action with its own plans to provide quotes and trade reporting for its biggest Nasdaq stocks up to 6.30 pm starting October 1 – a move that was applauded by the SEC. The NYSE will probably have to follow Nasdaq-Amex’s lead for its own large stocks to introduce transparency to what will be an increasingly turbulent after-hours market.
But here’s the big question: is Wall Street ready to work late? An anonymous NYSE specialist offers up the ‘straight dope’: ‘The question is, who really wants extended hours? Who is going to be buying and selling? A market is only as good as the participants, so if you don’t have a great deal of participants, we’re not going to have a good market. I don’t think the critical mass is there yet, and clearly there will be pretty big liquidity issues.’ In particular, he warns of creating a ‘pick-off market’, in which investors responding to news take advantage of the lack of liquidity.
Staffing up
Not many companies have considered the implications so far. Only 3 percent of investor relations officers responded with a ‘yes’ when Niri asked them back in June whether their companies were considering increasing staffing in the investor relations departments. ‘Many chief executives say that the investor is the most important external audience for the company,’ comments Thompson. ‘How and why do they think that they can staff an investor relations function with one or two people compared with large public relations departments? Investor relations people are overworked as it is, and 57 percent pick time management as their number one challenge. Suggesting that companies staff up is a no-brainer – particularly with extended trading hours.’
Ron Warren, investor relations officer at Theragenics Corp, agrees that late trading could put a strain on the investor relations department and would require some flexi-time. ‘Initially we would probably have to have someone in the office as long as the market is open,’ he considers, ‘at least until we work out quite how late trading will affect the investor relations function.’
Some west coast companies are gloating over how little the effect on them will be. Jim Foltz, director of financial relations at California’s National Semiconductor, points out that the new market hours would just move trading to his normal business hours. Besides, except when it comes to announcing earnings, he has almost never had to come in at 5 am like west coast sell-side analysts, which was something that he had feared when he took the job in the first place. In short, very little will change in his department with extended hours on Nasdaq and the NYSE.
Digestion time
The IROs with the most concerns are those used to releasing news after the market closes. First Call’s research director Chuck Hill suggests that late trading will make it more difficult to report earnings, and especially to have conference calls when the market’s closed. ‘There are companies that do release when the market is open, but the point is to give the analysts time to digest what was said and get something out to their clients before the market opens again. There’ll have to be a lot more stuff put out when the market’s open.’
National Semiconductor’s Foltz isn’t worried: ‘There’ll be no time when the market is after-market, but that’s no big deal.’ The solution lies in halting trading while the news is disseminated – as is often already the case. ‘Ten years ago trading halts were a bit shameful, but it’s much more routine now. Any vulnerability that companies have felt about a halt indicating a problem would probably vanish.’
Richard Wines, senior managing director for strategic research at Thomson Financial Investor Relations, agrees that the timing of an earnings release is not really a crucial issue. ‘The big worry for many companies is that releasing earnings results would be more difficult. But it turns out that only 11 percent announce after hours anyway. Secondly, there doesn’t seem to be any benefit to doing it that way – they’d be better off announcing it during market hours.’
In fact, Wines’ studies show that ‘after we had adjusted for the size of the earnings surprise, the biggest impact came with announcements after hours, and the smallest was with those announced during trading hours.’ He adds, ‘It wasn’t what we expected to find – but this aspect of extending trading hours should not be a problem.’
Sticking power
But what about analysts? Will they have to work two shifts? First Call’s Hill chuckles, ‘I don’t think people making seven figure salaries are going to come in on the night shift. The trading people can work two shifts, but the analysts and portfolio managers won’t be sticking around.’ That would lead, he suggests, to ‘distortions in stock trading on the basis of confusion – you wouldn’t have the volume to soak up some of the weird things that individuals might do.’
Despite his initial skepticism, Hill cites at the way brokers caved in on cheap e-trading. ‘Once someone crosses the line, the others will have to follow,’ he admits. ‘And if the brokers and analysts keep working later hours – although I really don’t think they will – then First Call will provide coverage, and certainly if the institutions are going to work later hours, then we’ll have our customer service people on later. We would respond to whatever the investment community was doing, and eat the cost of having more people on board the same way they would.’ He concludes, ‘I am not sure who benefits, though. Is it really going to be cost effective for the brokers to keep people around and participate? Or is it going to be all online? No one has come up with any answers.’
Thick & thin
Almost all market participants – like the anonymous specialist – are doubtful whether a late trading session will actually be busy enough to make for an efficient market. At Thomson, Wines contends that the biggest impact of extended hours will be to facilitate trading by individual investors. ‘After all, a lot of them are at work during the day – even then they still manage to trade a lot – I don’t know how they do it exactly,’ he muses, adding: ‘The corollary is more volatility, especially for the more thinly-traded issues. Trading will become more expensive if it is spread more over more time, and there will probably be wider spreads. What aftermarket trading there already is has a significantly wider spread.’
Those individual investors are important to Theragenics, making up 55 percent of the shareholder base (down from 93 percent five years ago). IRO Ron Warren recognizes that a lack of liquidity could cause wider price swings. ‘And without access to information from the company, if someone’s not available to squelch a rumor, it could be a free-for-all. My big concern would be if the rumor mill goes wild, which it can on occasion, and the stock price plummets or shoots way up.’ He adds, ‘There’s so much inaccurate information put out in chatrooms, it becomes a little scary at times.’
But while the liquidity glass looks half empty to some, Jim Foltz, as usual, seems to see it as half full. ‘There would be more liquidity in those later market hours,’ he states, explaining that a large-cap stock can already be traded anywhere in the world, any time. Institutions match large blocks for about an hour after the market closes on systems like Instinet’s crossing network, while some large dealers – ‘third market’ brokers such as Jefferies – can match stocks all night if they want to, then just report them at the open. Extending trading hours would extend the open market for smaller blocks, thereby adding liquidity. ‘The individual would have the opportunity to deal with a broader market.’
Wines poses interesting problems beyond immediate concerns of the investment community being forced to give up golf en masse unless the courses are floodlit. ‘Corporate buy-backs are currently prohibited from the last half of trading, so when will they be allowed in the future? Executive compensation announcements and index pricing are also tied to the end of trading.’
Spinning off yet more implications, he adds, ‘Increased volatility means that options using the Black-Scholes method become more valuable. If this method is used to allocate options, executives will get even more compensation simply because trading hours are extended. Institutional Shareholder Services will value those options more highly and take them into account in the voting recommendations for the various institutions. Not many people have thought of it,’ he adds brightly after a breathless recital of possible consequences. Nevertheless, on current prospects, Wines guesses, ‘Extended hours may not alter the financial markets very much, but new hours will certainly affect people’s lifestyles.’
Long way off
While the details are being worked out, the market grinds inexorably onwards, and even our skeptical NYSE specialist predicts a 24-hour-a-day trading day sometime in the future: ‘At some point it will happen, but I don’t think that day has come yet, and it’s going to take a long time to develop. Right now extended hours are not warranted just for the handful of small, retail investors who want to trade when they come home from work.’
Peter Schuman, director of investor relations at Coherent in California, says 24-hour trading will be a reality within five years. ‘We do over 60 percent of our sales overseas, and we have shareholders in Europe. It’s going to be easier for our German employees or customers to buy stock when they don’t have to conform to New York office hours. It’s leveling the playing field for more international investors.’
Of course, for continental European investors and companies it will be nearly midnight by the time a late trading session begins in New York at 6.30 pm EST. But the point holds: this is just another step toward 24 hour-trading, which will eventually offer a convenient time for all investors to buy or sell – whatever hours they keep and wherever they live.
Will the securities industry biggies see as many ripples? Will they even consider the effect on personal and professional lives? A public that is more than half inclined to blame Wall Street for the downsizing and more intensive work schedules of workers in the world at large, is hardly likely to cry too much if people like the analysts and brokers who work there find themselves working twice the hours for half the salary. So investor relations professionals had better begin considering the implications and lobbying their senior management right now if they ever want to be able to turn off their pagers.
Additional reporting by Neil Stewart
