SEC Approves 24X National Exchange for Extended Trading Hours
R Tamara de Silva
Summary: The SEC has approved 24X National Exchange to operate with extended trading hours, eventually aiming for nearly 24-hour weekday trading. This groundbreaking development shifts overnight trading from private dark pools to a transparent, regulated exchange. While this marks a major advancement in accessibility and market transparency, it raises questions about clearing, settlement, and risk management.
The U.S. Securities and Exchange Commission (SEC) recently approved 24X National Exchange’s application to become the first U.S. national securities exchange offering extended trading hours. Initially, the exchange will operate from 4:00 a.m. to 7:00 p.m. Eastern Time, with plans to extend trading to 23 hours per weekday, pending further regulatory approvals. This decision represents a significant shift in trading but raises questions about operational risks and market impacts.
Increased Transparency in Overnight Markets
One of the most significant aspects of 24X’s approval is its move from dark pools to a regulated “lit” market for overnight trading. Currently, brokers like Robinhood execute out-of-hours orders in dark pools. These private trading forums do not publicly disseminate prices. While efficient in some respects, they limit transparency and may prevent investors from accessing the best prices.
In contrast, 24X will bring overnight trades into the open. Trades will become part of the official public record. This change aims to improve price discovery and help investors achieve fairer pricing. Transparency has its challenges. Investors who are not actively monitoring the market during overnight hours might find themselves surprised by price movements, especially during volatile trading sessions.
However, trading on a lit market may also mean more orderly markets, policed for spoofing, eash trading and other market manipulative conduct that harms everyone, especially the integrity of the markets.
Clearing and Settlement Challenges
The approval of 24X also raises important questions about how trades will be cleared and settled during extended hours. Currently, overnight trading occurs on Alternative Trading Systems (ATSs). In these systems, clearing firms manage counterparty risk under National Securities Clearing Corporation (NSCC) rules. These clearing firms are well-versed in handling defaults during periods when the NSCC is not operational.
24X operates differently. The exchange does not rely on centralized clearing firms to manage the default risks of broker-dealer members. This absence of centralized risk management could expose market participants to increased risk if a broker-dealer defaults overnight.
The SEC’s approval order equates the risks of 24X’s overnight trading with those of ATSs. However, this perspective might underestimate the vital role clearing firms play in mitigating risk. Without similar mechanisms, 24X may find itself operating as a de facto clearing agency during these hours. This is concerning because the necessary infrastructure and safeguards may not be in place.
24X could address these issues by implementing a guaranty fund or similar safeguard. Such a measure would align the exchange with established risk management practices and protect market participants.
Who Bears the Risk?
Another key issue is what happens when a broker-dealer defaults. If the trades of a defaulting member are submitted to NSCC for clearing after the default, the NSCC’s acceptance will depend on its rules and timing. If the NSCC rejects the trades, the risk shifts. The exchange and its members may ultimately bear the burden. This possibility underscores the importance of robust risk management measures during extended trading hours. Operational and software changes will have to take place to accommodate 24 hour trading.
The SEC’s Perspective: Balancing Innovation and Risk
In theirjoint statement, SEC Commissioners Hester M. Peirce and Caroline A. Crenshaw discussed the potential benefits and challenges of 24X’s extended trading hours. They highlighted that an overnight session on a regulated exchange could make trading more accessible for both U.S. and international investors. This could expand market participation.
However, the Commissioners also emphasized the importance of investor disclosures. They noted the need to inform investors about the unique risks of overnight trading. Additionally, they stressed that operational changes, such as ensuring the Equity Data Plans function concurrently, are essential for maintaining market integrity.
A New Era With New Responsibilities
The transition from dark pools to a lit market for overnight trading brings clear advantages. Transparency and improved price discovery are significant benefits. Yet, this transition also introduces challenges for risk management, operational stability, and investor protection. Market participants must be ready for the unique dynamics of extended trading hours, including potential volatility-and undoubtedly operational changes will take place to adjust.
For 24X, the path forward requires robust safeguards, such as guaranty funds, to protect participants. Equally important is educating investors about the risks and opportunities presented by nearly round-the-clock trading. Both are essential for the success of this initiative.
Conclusion
The SEC’s approval of 24X is a major development for U.S. markets. The extended trading hours offer unprecedented accessibility and transparency. The expansion also shows the complexity of balancing innovation with investor protection.
This will attract retail investors and that does not have to be a bad thing.
As 24X prepares to extend its trading hours, it must navigate both opportunities and challenges. The long-term success of this new trading paradigm will depend in part on addressing operational risks and ensuring market stability while offering greater access to investors.