14 ms·

They say that stocks go down during the day and up at night

197 points by kuhewa 4y ago

olalonde 4y ago
If I understand the graph correctly, it is showing cumulative returns where the bulk of the returns happened in just a few days around 2008. It would be a lot more useful to see the relative intraday returns but the graph would look a lot less dramatic.
bryanrasmussen 4y ago
Since the article is not very informative, and it's a real rabbit hole to try to track this stuff down across all the linked articles etc. and as I don't even really care about stocks and the market, I am only left with one question which I did not find answered anywhere yet - what exactly does day and night mean in the context of the whole world trading?
- deleted 4y ago
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- JDEW 4y ago
  From what I gathered: Intraday returns: the difference in price from market open to market close Overnight returns: the difference in price from market close to the next day’s market open. They are only talking about stocks and they are traded on markets with opening hours < 24h.
- menage 4y ago
  Presumably open and closed hours for the stock exchange on which that stock trades.
- slavtoad 4y ago
  Day = daily interval during which the exchange is open for trading. Night = daily interval during which the exchange is closed for trading.
- dkrich 4y ago
  Simply put, day means if you bought on the market open and sold at the close. Night means if you bought on the close and sold on the open. The implication seems to be stocks jump at the open then trail off during the day. Thing is most of this is only obvious in retrospect and by the time you realize it the opportunity is gone because it’s now widely known.
  - 4ggr0 4y ago
    As someone who doesn't know much about stocks and trading - is it normal to keep stocks for only <12h? All comments talk about morning -> evening or evening -> morning, what about morning -> morning, or even longer timespans? Or is this the difference between trading and investing?
    - ale42 4y ago
      You can keep stocks only for milliseconds if you wish... (see e.g. https://en.wikipedia.org/wiki/High-frequency_trading https://en.wikipedia.org/wiki/High-frequency_trading). And for the less extreme version there's day trading (https://en.wikipedia.org/wiki/Day_trading https://en.wikipedia.org/wiki/Day_trading) where you sell all your positions before the market closes (basically you try to speculate on intra-day changes of the stocks, so you keep them from minutes to hours). > Or is this the difference between trading and investing? Probably, or rather between purely speculating and investing?
      - twic 4y ago
        I don't think trading is the same as speculating. To me, speculating is making big directional bets, eg "I think oil is underpriced right now, so i am going to buy loads of oil futures, then hope that in three months i can sell them at a much higher price". Whereas trading is usually much shorter-term and less directional, eg "I think French government bonds are overpriced relative to German government bonds right now, so i am going to get short French bond futures, buy an equivalent amount of German cash bonds, then hope that in a couple of days i can unwind that for a profit". And investing is "people like to drink Coca-Cola, so i will buy shares in the Coca-Cola company". But i don't think there are hard and fast definitions.
- misja111 4y ago
  Each stock is listed at some exchange. There are companies that have stock listed at several exchanges, but the stock tickers have a postfix that identifies the exchange they are listed on so you can still distinguish them. And for such companies, one of those exchanges is the 'primary exchange' of the stock. Normally the vast majority of trades of a stock happen on its primary exchange. So, since each stock has a primary exchange, the 'day' and 'night' refer to the time zone of that particular exchange.
- kgwgk 4y ago
  Intraday means you buy some stock - in some exchange - in the morning at the open price in the opening auction and sell the stock in the evening at the close price in the closing auction. Overnight means you take the other side: buy at the close and sell at the open. (This is a bit more complex conceptually as you would never settle the trades and that may be problematic regarding dividends and other corporate actions.)
  - intronic 4y ago
    Could you please explain this complexity? ELI5 even? You never settle the trades? Dividends etc? Hmm maybe I am 5... Edit: ok yep so I guess what if they repeated the analysis leaving some time around open/close for chance of trades to settle, would the effect disappear or would this chance beef the key factor for the reported gain?
    - kgwgk 4y ago
      Settlement is when you actually own the stock you bought and the seller actually gets your money. That happens a couple of days after the trade. In the meantime it’s just “as if” but not quite and that has practical consequences. For example you can’t take your money out of the brokerage account until it’s really there.
      - intronic 4y ago
        Thanks! I was figuring this out just now as well thanks. The analysis is flawed if it doesn't include this as the gains they describe seem essentially unrealisable. So is the real issue that maybe someone has immediate settlement when the rest don't?
        kgwgk 4y ago
        That would be an issue only a few days per year - and not at all for stocks not paying dividends.
  - toast0 4y ago
- TeMPOraL 4y ago
  > I am only left with one question which I did not find answered anywhere yet - what exactly does day and night mean in the context of the whole world trading? While we're at it, I have a related question: why do the exchanges even "open" and "close"? Surely in our globalized digital economy, it's not just "day" and "night" that are meaningless, but the very concept of "opening hours" itself.
  - erfgh 4y ago
    Probably due to labor unions.
    - techdragon 4y ago
      Actually, it’s mostly down to the computers now. Having downtime is advantageous to the primary customers of the stock market. If you have the same “off and on” times as your competitors you can ensure your operations are structured in such a way that you don’t have to deal with a whole class of systemic risks, no need to roll out up’s to FPGA powered acceleration devices live where the smallest mistakes can cost money for every second they are wrong let alone if they are broken … to more mundane things like being able to reprocess the data trading data and analyse performance vs other prediction models… effectively the downtime is for the high frequency traders and the algorithm traders and all the players paying for direct access to the stock market for their computer systems… it’s effective a digital cage match from bell ring to closing time and it’s in the best interests of all the competitors to only have to fight the same 8-12 hours in the cage, lest it becomes a much more expensive 24/7 war of attrition.
    - andy_jensen 4y ago
      Yea, and people who drive electric cars!
    - twic 4y ago
      I'd be interested to know how you came to that conclusion.
    - bobthepanda 4y ago
      As a profession, Wall Street traders could not be farther from unionized.
- deleted 4y ago
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- quantgenius 4y ago
  In the US the stock market officially opens at 9:30 and closes at 16:00 NY time every day. The day return is the return from the first trade (the official opening price but it would take too long to explain the the difference) at or after 9:30 to the last trade at or before 16:00 (the official closing price) and the night return is the return from the closing price to the opening price the next trading day.
  - MuffinFlavored 4y ago
    premarket 7am NY to 9:29am NY regular market ends 3:59:59pm NY post market starts 4:00pm NY, ends 8:00pm NY correct? 8pm to 7am there’s no way to trade something like SPY and to be honest as a retail investor, can i even buy pre/post market on like, fidelity?
    - yareally 4y ago
      You can trade SPX (which is what SPY is based on) via IBKR after hours. SPX is only options though. They may have extended that to SPY as well now though, since SPY now has daily expiring options. There's also S&P (ES), NASDAQ (NQ) and other futures. They trade 23/6, closing at 5pm EST on Friday and reopen on Sunday at 6pm EST. Otherwise, they're trading 23 hours a day, except between 5pm and 6pm EST Mon-Fri
      - MuffinFlavored 4y ago
        Who/what is able to trade equities specifically (like SPY the ETF, or any of its underlying components like AAPL, META, etc.) pre-market and/or post-market?
        yareally 4y ago
        Anyone that uses IBKR as their broker can trade what I mentioned above pre/post market (and some cases overnight). IBKR is a retail broker. I use them, for example. Most brokers in the US let you trade common stock before and after market hours, even ones like webull. That said, not every broker has the same pre/post market trading hours, but the better ones let you trade almost all day and night depending on the underlying equity. https://www.interactivebrokers.com/en/?f=%2Fen%2Ftrading%2Ftrading-hours.php https://www.interactivebrokers.com/en/?f=%2Fen%2Ftrading%2Ft... https://ir.cboe.com/news-and-events/2021/06-15-2021/cboe-extend-global-trading-hours-vix-and-spx-options-nearly-24-hours-beginning-november-21-2021 https://ir.cboe.com/news-and-events/2021/06-15-2021/cboe-ext... https://www.reddit.com/r/options/comments/xr3gqb/where_can_i_trade_spx_options_245/ https://www.reddit.com/r/options/comments/xr3gqb/where_can_i...
russellbeattie 4y ago
So am I understanding this correctly that massive algorithms are shorting stocks first thing in the morning - like in the first few seconds of trading - and then consolidating their positions before close. They basically can do this regularly essentially guaranteeing returns that the rest of us aren't able to take advantage of. And the SEC's lack of enforcement has allowed this practice to continue for the past decade or more. Is this the "strategy"?
- notahacker 4y ago
  More or less the opposite: stock sold off cheaply in the evening got sold for more in the morning. Probably algorithms involved in selling, but more likely they were prepared to take lower returns to not risk holding AIG overnight rather than as some sort of market manipulation strategy But the main factor in the divergence in that chart in 2008-9 - as one of the comments points out - is that AIG announced a lot of bad news during the financial crisis during the daytime but never collapsed overnight.
united893 4y ago
YOu're graphing a random walk with a single black swan event (2008 crash). A more honest graph would just have the day/night delta mapped out, not integrated in.
- vitus 4y ago
  Indeed. I pulled the data and mostly reproduced the results when starting on Jan 1, 1990 (I got 1/20 of a penny for day trading, but "only" somewhere in the $600-650 range for overnight trading, depending on the choice of end date. Close enough to proceed with additional analysis, IMO. If instead I pick my starting point as Jan 1, 2012, I see $1.15 for day trading vs $2.24 for overnight trading. (Note that there was again another black swan event in Feb-March 2020, before which point day trading was actually doing better than overnight trading.) Tracking deltas (well, day-over-day multipliers) as you suggest since 1990 shows that the two shapes are qualitatively more similar (although day trading is more volatile): - 0.1st percentile: day trading: 0.803 vs overnight trading: 0.871 - 1st percentile: day trading: 0.932 vs overnight trading: 0.960 - 99th percentile: day trading: 1.059 vs overnight trading: 1.052 - 99.9th percentile: day trading: 1.189 vs overnight trading: 1.222
- epistemer 4y ago
  To say it is a random walk is confusing a model of reality with reality. Totally agree with the other poster though. You can pretty much prove whatever you want in the market depending on the start date and window size. I would think the driving factor is after market earnings releases, expectations for those releases and how many there randomly happen to be during the window in question.
sacrosancty 4y ago
This has to be too simple to be the reason, but I immediately thought it's because exchange opening hours are less than the closed hours each day, and since stocks generally go up, more of the increase should happen at night on average.
helsinkiandrew 4y ago
There's a few (often contradictory) explanations for this. My favourite is: Things that can be sold quickly are safer (because you can sell them if bad news comes out) so are worth less than less liquid things, like holding stocks when the market is closed. So by holding stocks overnight you are being payed for taking on the risk by those selling them before closing.
- dTal 4y ago
  So the stock goes up overnight because of the risk that... the stock will go down overnight? Surely if the risk was real, the stock would actually go down sometimes, and cancel out the "free lunch", and on average there would be no effect to explain!
  - notahacker 4y ago
    The risk is real, but many people are risk averse enough to be prepared to take a small loss [or lesser profit] to avoid risk of a bigger loss in basically every market anywhere - that's why insurance is a thing! And you could see an effect in some individual stocks of traders whose strategies rely on reacting to stuff fast allowing traders whose strategies don't to profit by risking holding onto the stock for at least several hours, even if the average effect was zero because a few other stocks did have bad news overnight giving the bagholders of those stocks big losses...
  - Panzer04 4y ago
    "Risk" as markets consider it is more about volatility. The higher the volatility, the more likely you are to make (or lose) money. People being as they are, volatility is usually perceived negatively and it causes people to be less willing to pay for volatile assets. Look at the lengths people will go to for a nonvolatile risk-free return in bonds or bank accounts - but they know they can only lose a few percent if things go wrong (eg. interest rate rises). If you take that volatility risk, you are rewarded for it with higher returns, on average :)
  - helsinkiandrew 4y ago
    Sometimes it does go down - I think the linked article says you need to be buying and selling billions of dollars of stocks for a long time to make the profit. But another reason is that people are selling it before close, which lowers the price then buy again on open - which increases the price. Many day traders will close out their trades at the end of the day and start again the next day so they can't loose anything overnight, although they can't gain anything either - they're willing to loose that for the peace of mind.
anonu 4y ago
Good luck replicating this in sample. Open and closing auctions are going to crush your strategy from a cost and slippage perspective. In addition you should be looking at risk adjusted return. The overnight volatility is way higher than the intraday. Are you being paid for each unit of risk you're taking?
- paulpauper 4y ago
  Even accounting for such costs, it may still provide excess real returns.
deleted 4y ago
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dgacmu 4y ago
_if_ this actually holds... (1) "overnight" is longer than intraday: the NYSE on which AIG is traded is only open for 27% of the day (930-1600). That's not enough to explain the effect, though. (2) many (most?) large companies announce financial results after market close. Assuming that's one of the long-term drivers of change, it makes sense there's more net movement when you include those.
lexapro 4y ago
There are even ETFs that take advantage of this: https://www.nightsharesetfs.com/nspy https://www.nightsharesetfs.com/nspy Has a pretty high expense ratio as it's not cheap to implement this strategy and there is no competition at the moment.
deleted 4y ago
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lvl102 4y ago
The answer is simply that more than 3/4 of liquidity events occur outside of market hours. People especially academics who bring this up are idiots.
- yareally 4y ago
  While I tend to agree that's true (pmi, cpi, payroll, etc all happen before the market opens), it could have been worded better
snake_doc 4y ago
The Overnight Drift: https://libertystreeteconomics.newyorkfed.org/2021/05/the-overnight-drift-in-us-equity-returns/ https://libertystreeteconomics.newyorkfed.org/2021/05/the-ov... There’s a bunch of speculation on why this happens: https://www.ft.com/content/1cc17824-3077-4e39-9a99-cbccc83a2251 https://www.ft.com/content/1cc17824-3077-4e39-9a99-cbccc83a2...
kwhitefoot 4y ago
> If you invested $1 in AIG at the start of 1990 and received only intraday returns This is the problem with all stock market related articles: they all hinge on if you had done this or that. They never tell you I actually performed these two strategies and here are the results. It would be quite simple to perform such experiments but it seems that it is either never done or is perhaps kept confidential.
- WJW 4y ago
  In this case I'd expect the costs of trading in and out of the position everyday to be prohibitive. Even if your broker doesn't charge you anything (or you are a prop trading desk with zero trading fees), just paying the spread every day would add up quickly over time. It might not be possible to perform such an experiment at all in the real world. It's still interesting from an academic standpoint though, if only to show how long term pricing inefficiencies can persist over long time periods even in otherwise efficient markets.
tristanj 4y ago
There are several explanations for this phenomena: * The largest moves in price occur after quarterly earnings announcements, which are released after-hours. Same with other material announcements. * Prices are more volatile after-hours because there are fewer market participants. Because the order book is smaller, the same sized trade will have a larger effect on price after-hours compared to during trading hours. * Some traders at hedge funds are limited on how much $ they can hold overnight by risk management. This is because there is less liquidity and it is difficult to unload if a position implodes overnight. To reduce risk, they sell end of day, and buy back after market open. * For the above two reasons, holding overnight confers more risk, which will be rewarded by the market with higher returns. * (personal speculation): The "positive returns for holding after-hours" effect reflects the general trend of the stock market. Stocks have trended upwards for the past several decades, so the effect is currently positive. If stocks were to trend downwards for several years, I'd expect this the after-hours effect to also be negative. I have not backtested this.
- Panzer04 4y ago
  Night is generally just longer too, so you're taking on more risk regardless of liquidity as well (more time holding the stock, more time for good/bad news, on average you get rewarded for that risk)
- logicalmonster 4y ago
  Another reason is that the circuit breakers that halt wild stock movements during the day don't apply in after hours trading.
- magwa101 4y ago
  [dead]
- evrydayhustling 4y ago
  Add to all of these that the return is uninvestable, so the market cannot eliminate the arbitrage. 1016x over 30 years is a gain of less than 0.001% per trading day. You would have spent much more than this through fees and market impact to buy and sell the stock each day, especially at any real volume. The market is full of uninvestable or tiny capacity trades like this. A reliable pattern gets created by trading flows like the ones described in other replies, and it doesn't get arbed out because it is uninvestable or has tiny capacity.
beowulfey 4y ago
I haven’t seen the original source that proposed this cited here yet. Here is the explanation on ArXiv: https://arxiv.org/pdf/1811.04994.pdf https://arxiv.org/pdf/1811.04994.pdf
lisper 4y ago
It's not just day vs night that is weird but also that almost all of the divergence happened in a very short time span around 2010.
- quantgenius 4y ago
  The divergence in AIG occurred to a large extent in 2010. However, this effect is present for most stocks and the indices as well and has existed for pretty much as long as we have reliable data without survivorship and lookahead bias. Is it surprising to you that the effect was larger for AIG around 2010? As AIG was going bankrupt and the common stock holders were effectively getting wiped out, individuals were willing to hold AIG during the day to play crazy intra-day volatility but unwilling to hold AIG overnight because most announcements around restructuring were happening overnight. Of course at the time short sales on a list of stocks including AIG were forbidden. So even if you ignore the fact that most day traders etc prefer to play things on the long side, you have the issue that they couldn't play the short side even if they wanted to.
quantgenius 4y ago
A large trading firm, particularly one that had the capability to trade cheaply enough to take advantage of this effect would never do this simply because 50%+ of the return of a single stock is determined by the return of a common market factor. If you take a position in a long only stock portfolio, you may own many stocks but statistically, particularly if the portfolio is only held overnight, it's a large bet on the direction of the market plus some noise. So you are taking a massive binary bet that is going to go wrong anytime the market opens down. This is why most high Sharpe ratio equity trading strategies involve short selling even though equities have a strong upward bias. If you eliminate the effect of the market factor, you have a portfolio that is made up many statistically independent bets. For example, if you take a bet that is expected to make +/-1000 dollars with an equity portfolio, and it's long only, it's like tossing one coin to determine whether you make 500-700 dollars of the 1000 and then tossing coins repeatedly to determine the outcome of the remaining 300-500 dollars one dollar at a time. If the portfolio was market neutral, i.e. long and short in equal amounts, it's like you toss the coin 1000 times, each coin toss determining only 1 dollar of the outcome. If you believe the coin is biased even somewhat in your favor, as it usually is when you are trading a high quality strategy, the second option is far better. Given the kind of risk-adjusted returns achievable by a firm that could trade cheaply enough to take advantage of this effect by other means, even using relatively simple well-known strategies, doing this would hurt their risk adjusted return and the returns they could generate on their risk capital. So the odds that there is a large long-lived firm doing this to mark their book and causing this effect is likely close to 0. Others have mentioned several explanations for the effect. To this I will add one more, which I think is at least, if not more likely than the rest. Retail day-traders, some of whom are larger than people realize have a long bias, ie they are far more likely to hold a stock long than short sell it and they tend to close out their positions at the end of every day. Seems like the authors have an axe to grind more than a point to make. The paper reads like the kind of certainty a completely uninformed but (markets are made up of evil people) true-believing crusader has. To me it seems like the kind of situation where someone doesn't yet know enough about a subject to know how little they know, in this case buttressed up by the broken credentialing system we call our education system. The claim in my opinion is complete nonsense. Edit: Fixed grammar.
westonplatter0 4y ago
There are reasons. Check out Cem Karsan and his views on option related flows, ie, Vanna and Charm. https://twitter.com/jam_croissant/status/1487959533058244615?lang=en https://twitter.com/jam_croissant/status/1487959533058244615...
traceroute66 4y ago
> They say that stocks go down during the day and up at night There are lots of things "they say" about the markets, "sell in May and go away" is another famous one. Most of it pure BS, some of it is half-true, and the rest are sayings that date back to the "good old days" pre-HFT, Hedge Funds and leveraged trading. Frankly "stocks go up at night" is a ludicrous proposition. Feel free to give it a go, but corporate actions, corporate RNS, world events ....."events dear boy, events" will very happily shit on you from a great height if you think you're going to make money through short-term overnight holding. "Time in the market is better than timing the market" is about the only true saying that remains.
- ChicagoBoy11 4y ago
  This one, too, turns out to be incorrect. The source of this is mostly due to the fact that, in fact, if you average out over a longer time horizon, your annualized returns do in fact average out. However, what people miss is that fact that this annualization is being compounded over that entire time as well, so small disturbances to it end up having quite a substantial impact on that end result. The only REAL form of diversification is asset class, not time.
kerblang 4y ago
On a tangential note, I've been meaning to pursue a silly hypothesis that you could buy cryptocurrency low on mondays and sell high on weekends, because that's when recreational gamblers gamble most - an extension of pandemic-bubble thinking. Just wondering if anybody ever graphed it out...
- olalonde 4y ago
  Almost the opposite effect exists: Bitcoin returns on Mondays are significantly higher than those on the other days of the week[0]. [0] https://www.sciencedirect.com/science/article/pii/S1544612318304240 https://www.sciencedirect.com/science/article/pii/S154461231...
  - kerblang 4y ago
    Ah, thanks, interesting paper > In general this strategy is profitable, both for the full sample and for individual years, but in most cases the results are not statistically different from the random trading case, and therefore they do not represent evidence of market inefficiency. Another hypothesis for the wood chipper
- red-iron-pine 4y ago
  interesting. got a friend working on a master's in finance, will mention this to him, has good semester project / thesis potential.
AlbertCory 4y ago
There are any number of "strategies" that appear to work. Here's one where you trade commodities based only on the day of the month: https://www.youtube.com/watch?v=3kNAYC6y0kc https://www.youtube.com/watch?v=3kNAYC6y0kc
beefman 4y ago
SSRN is down right now. Here's the paper: https://arxiv.org/pdf/2201.00223.pdf https://arxiv.org/pdf/2201.00223.pdf
paulpauper 4y ago
There are many inefficiencies still left in the market. This is what quant funds do: comb through huge troves of data to find them.
nomy99 4y ago
in a global economy wouldn't this just self regulate because of night/day cycle of earth. i.e day in china and night in usa vice versa
HardwareLust 4y ago
This is interesting, but how can I take this knowledge and practically apply it to the market to make a profit?
thedangler 4y ago
I'm still convinced the market is fake and they keep making up more rules and ways to make money because its a Ponzy Scheme ready to collapse. Filter money from the retail to the elite few. Don't get me wrong some people make money but its very far and few between and don't think for a moment they won't come after your 401ks for "liquidity" There is no real regulation. -Market Manipulation happens all the time. -Large institutions, Hedge Funds, and MM can make the market do what ever they want (within reason and time). -Cellar Boxing is real. -Latter Attacks are real. -Placing fake buy and sell order. -PFOF is a scam. -Waving your friends Billion $ margin -Using Fake funds as collateral to beat margin -Internalizing orders. -Synthetic shares... -Family Institutions -Self Reporting -Fail To Delivers can go on for years. -Manipulation real value by placing sell orders on LIT exchanges and buy orders in "Dark Pools" -0 fraction reserve lending. -Hide position is Swaps.. Which are not reported... I mean come on....

197 points by kuhewa 4y ago

If I understand the graph correctly, it is showing cumulative returns where the bulk of the returns happened in just a few days around 2008. It would be a lot more useful to see the relative intraday returns but the graph would look a lot less dramatic.

bryanrasmussen 4y ago

Since the article is not very informative, and it's a real rabbit hole to try to track this stuff down across all the linked articles etc. and as I don't even really care about stocks and the market, I am only left with one question which I did not find answered anywhere yet - what exactly does day and night mean in the context of the whole world trading?

deleted 4y ago
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JDEW 4y ago
From what I gathered: Intraday returns: the difference in price from market open to market close Overnight returns: the difference in price from market close to the next day’s market open. They are only talking about stocks and they are traded on markets with opening hours < 24h.
menage 4y ago
Presumably open and closed hours for the stock exchange on which that stock trades.
slavtoad 4y ago
Day = daily interval during which the exchange is open for trading. Night = daily interval during which the exchange is closed for trading.
dkrich 4y ago
Simply put, day means if you bought on the market open and sold at the close. Night means if you bought on the close and sold on the open. The implication seems to be stocks jump at the open then trail off during the day. Thing is most of this is only obvious in retrospect and by the time you realize it the opportunity is gone because it’s now widely known.
- 4ggr0 4y ago
  As someone who doesn't know much about stocks and trading - is it normal to keep stocks for only <12h? All comments talk about morning -> evening or evening -> morning, what about morning -> morning, or even longer timespans? Or is this the difference between trading and investing?
  - ale42 4y ago
    You can keep stocks only for milliseconds if you wish... (see e.g. https://en.wikipedia.org/wiki/High-frequency_trading https://en.wikipedia.org/wiki/High-frequency_trading). And for the less extreme version there's day trading (https://en.wikipedia.org/wiki/Day_trading https://en.wikipedia.org/wiki/Day_trading) where you sell all your positions before the market closes (basically you try to speculate on intra-day changes of the stocks, so you keep them from minutes to hours). > Or is this the difference between trading and investing? Probably, or rather between purely speculating and investing?
    - twic 4y ago
      I don't think trading is the same as speculating. To me, speculating is making big directional bets, eg "I think oil is underpriced right now, so i am going to buy loads of oil futures, then hope that in three months i can sell them at a much higher price". Whereas trading is usually much shorter-term and less directional, eg "I think French government bonds are overpriced relative to German government bonds right now, so i am going to get short French bond futures, buy an equivalent amount of German cash bonds, then hope that in a couple of days i can unwind that for a profit". And investing is "people like to drink Coca-Cola, so i will buy shares in the Coca-Cola company". But i don't think there are hard and fast definitions.
misja111 4y ago
Each stock is listed at some exchange. There are companies that have stock listed at several exchanges, but the stock tickers have a postfix that identifies the exchange they are listed on so you can still distinguish them. And for such companies, one of those exchanges is the 'primary exchange' of the stock. Normally the vast majority of trades of a stock happen on its primary exchange. So, since each stock has a primary exchange, the 'day' and 'night' refer to the time zone of that particular exchange.
kgwgk 4y ago
Intraday means you buy some stock - in some exchange - in the morning at the open price in the opening auction and sell the stock in the evening at the close price in the closing auction. Overnight means you take the other side: buy at the close and sell at the open. (This is a bit more complex conceptually as you would never settle the trades and that may be problematic regarding dividends and other corporate actions.)
- intronic 4y ago
  Could you please explain this complexity? ELI5 even? You never settle the trades? Dividends etc? Hmm maybe I am 5... Edit: ok yep so I guess what if they repeated the analysis leaving some time around open/close for chance of trades to settle, would the effect disappear or would this chance beef the key factor for the reported gain?
  - kgwgk 4y ago
    Settlement is when you actually own the stock you bought and the seller actually gets your money. That happens a couple of days after the trade. In the meantime it’s just “as if” but not quite and that has practical consequences. For example you can’t take your money out of the brokerage account until it’s really there.
    - intronic 4y ago
      Thanks! I was figuring this out just now as well thanks. The analysis is flawed if it doesn't include this as the gains they describe seem essentially unrealisable. So is the real issue that maybe someone has immediate settlement when the rest don't?
      - kgwgk 4y ago
        That would be an issue only a few days per year - and not at all for stocks not paying dividends.
- toast0 4y ago
TeMPOraL 4y ago
> I am only left with one question which I did not find answered anywhere yet - what exactly does day and night mean in the context of the whole world trading? While we're at it, I have a related question: why do the exchanges even "open" and "close"? Surely in our globalized digital economy, it's not just "day" and "night" that are meaningless, but the very concept of "opening hours" itself.
- erfgh 4y ago
  Probably due to labor unions.
  - techdragon 4y ago
    Actually, it’s mostly down to the computers now. Having downtime is advantageous to the primary customers of the stock market. If you have the same “off and on” times as your competitors you can ensure your operations are structured in such a way that you don’t have to deal with a whole class of systemic risks, no need to roll out up’s to FPGA powered acceleration devices live where the smallest mistakes can cost money for every second they are wrong let alone if they are broken … to more mundane things like being able to reprocess the data trading data and analyse performance vs other prediction models… effectively the downtime is for the high frequency traders and the algorithm traders and all the players paying for direct access to the stock market for their computer systems… it’s effective a digital cage match from bell ring to closing time and it’s in the best interests of all the competitors to only have to fight the same 8-12 hours in the cage, lest it becomes a much more expensive 24/7 war of attrition.
  - andy_jensen 4y ago
    Yea, and people who drive electric cars!
  - twic 4y ago
    I'd be interested to know how you came to that conclusion.
  - bobthepanda 4y ago
    As a profession, Wall Street traders could not be farther from unionized.
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quantgenius 4y ago
In the US the stock market officially opens at 9:30 and closes at 16:00 NY time every day. The day return is the return from the first trade (the official opening price but it would take too long to explain the the difference) at or after 9:30 to the last trade at or before 16:00 (the official closing price) and the night return is the return from the closing price to the opening price the next trading day.
- MuffinFlavored 4y ago
  premarket 7am NY to 9:29am NY regular market ends 3:59:59pm NY post market starts 4:00pm NY, ends 8:00pm NY correct? 8pm to 7am there’s no way to trade something like SPY and to be honest as a retail investor, can i even buy pre/post market on like, fidelity?
  - yareally 4y ago
    You can trade SPX (which is what SPY is based on) via IBKR after hours. SPX is only options though. They may have extended that to SPY as well now though, since SPY now has daily expiring options. There's also S&P (ES), NASDAQ (NQ) and other futures. They trade 23/6, closing at 5pm EST on Friday and reopen on Sunday at 6pm EST. Otherwise, they're trading 23 hours a day, except between 5pm and 6pm EST Mon-Fri
    - MuffinFlavored 4y ago
      Who/what is able to trade equities specifically (like SPY the ETF, or any of its underlying components like AAPL, META, etc.) pre-market and/or post-market?
      - yareally 4y ago
        Anyone that uses IBKR as their broker can trade what I mentioned above pre/post market (and some cases overnight). IBKR is a retail broker. I use them, for example. Most brokers in the US let you trade common stock before and after market hours, even ones like webull. That said, not every broker has the same pre/post market trading hours, but the better ones let you trade almost all day and night depending on the underlying equity. https://www.interactivebrokers.com/en/?f=%2Fen%2Ftrading%2Ftrading-hours.php https://www.interactivebrokers.com/en/?f=%2Fen%2Ftrading%2Ft... https://ir.cboe.com/news-and-events/2021/06-15-2021/cboe-extend-global-trading-hours-vix-and-spx-options-nearly-24-hours-beginning-november-21-2021 https://ir.cboe.com/news-and-events/2021/06-15-2021/cboe-ext... https://www.reddit.com/r/options/comments/xr3gqb/where_can_i_trade_spx_options_245/ https://www.reddit.com/r/options/comments/xr3gqb/where_can_i...

russellbeattie 4y ago

So am I understanding this correctly that massive algorithms are shorting stocks first thing in the morning - like in the first few seconds of trading - and then consolidating their positions before close. They basically can do this regularly essentially guaranteeing returns that the rest of us aren't able to take advantage of. And the SEC's lack of enforcement has allowed this practice to continue for the past decade or more. Is this the "strategy"?

notahacker 4y ago
More or less the opposite: stock sold off cheaply in the evening got sold for more in the morning. Probably algorithms involved in selling, but more likely they were prepared to take lower returns to not risk holding AIG overnight rather than as some sort of market manipulation strategy But the main factor in the divergence in that chart in 2008-9 - as one of the comments points out - is that AIG announced a lot of bad news during the financial crisis during the daytime but never collapsed overnight.

united893 4y ago

YOu're graphing a random walk with a single black swan event (2008 crash). A more honest graph would just have the day/night delta mapped out, not integrated in.

vitus 4y ago
Indeed. I pulled the data and mostly reproduced the results when starting on Jan 1, 1990 (I got 1/20 of a penny for day trading, but "only" somewhere in the $600-650 range for overnight trading, depending on the choice of end date. Close enough to proceed with additional analysis, IMO. If instead I pick my starting point as Jan 1, 2012, I see $1.15 for day trading vs $2.24 for overnight trading. (Note that there was again another black swan event in Feb-March 2020, before which point day trading was actually doing better than overnight trading.) Tracking deltas (well, day-over-day multipliers) as you suggest since 1990 shows that the two shapes are qualitatively more similar (although day trading is more volatile): - 0.1st percentile: day trading: 0.803 vs overnight trading: 0.871 - 1st percentile: day trading: 0.932 vs overnight trading: 0.960 - 99th percentile: day trading: 1.059 vs overnight trading: 1.052 - 99.9th percentile: day trading: 1.189 vs overnight trading: 1.222
epistemer 4y ago
To say it is a random walk is confusing a model of reality with reality. Totally agree with the other poster though. You can pretty much prove whatever you want in the market depending on the start date and window size. I would think the driving factor is after market earnings releases, expectations for those releases and how many there randomly happen to be during the window in question.

sacrosancty 4y ago

This has to be too simple to be the reason, but I immediately thought it's because exchange opening hours are less than the closed hours each day, and since stocks generally go up, more of the increase should happen at night on average.

helsinkiandrew 4y ago

There's a few (often contradictory) explanations for this. My favourite is: Things that can be sold quickly are safer (because you can sell them if bad news comes out) so are worth less than less liquid things, like holding stocks when the market is closed. So by holding stocks overnight you are being payed for taking on the risk by those selling them before closing.

dTal 4y ago
So the stock goes up overnight because of the risk that... the stock will go down overnight? Surely if the risk was real, the stock would actually go down sometimes, and cancel out the "free lunch", and on average there would be no effect to explain!
- notahacker 4y ago
  The risk is real, but many people are risk averse enough to be prepared to take a small loss [or lesser profit] to avoid risk of a bigger loss in basically every market anywhere - that's why insurance is a thing! And you could see an effect in some individual stocks of traders whose strategies rely on reacting to stuff fast allowing traders whose strategies don't to profit by risking holding onto the stock for at least several hours, even if the average effect was zero because a few other stocks did have bad news overnight giving the bagholders of those stocks big losses...
- Panzer04 4y ago
  "Risk" as markets consider it is more about volatility. The higher the volatility, the more likely you are to make (or lose) money. People being as they are, volatility is usually perceived negatively and it causes people to be less willing to pay for volatile assets. Look at the lengths people will go to for a nonvolatile risk-free return in bonds or bank accounts - but they know they can only lose a few percent if things go wrong (eg. interest rate rises). If you take that volatility risk, you are rewarded for it with higher returns, on average :)
- helsinkiandrew 4y ago
  Sometimes it does go down - I think the linked article says you need to be buying and selling billions of dollars of stocks for a long time to make the profit. But another reason is that people are selling it before close, which lowers the price then buy again on open - which increases the price. Many day traders will close out their trades at the end of the day and start again the next day so they can't loose anything overnight, although they can't gain anything either - they're willing to loose that for the peace of mind.

anonu 4y ago

Good luck replicating this in sample. Open and closing auctions are going to crush your strategy from a cost and slippage perspective. In addition you should be looking at risk adjusted return. The overnight volatility is way higher than the intraday. Are you being paid for each unit of risk you're taking?

paulpauper 4y ago
Even accounting for such costs, it may still provide excess real returns.

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dgacmu 4y ago

_if_ this actually holds... (1) "overnight" is longer than intraday: the NYSE on which AIG is traded is only open for 27% of the day (930-1600). That's not enough to explain the effect, though. (2) many (most?) large companies announce financial results after market close. Assuming that's one of the long-term drivers of change, it makes sense there's more net movement when you include those.

lexapro 4y ago

There are even ETFs that take advantage of this: https://www.nightsharesetfs.com/nspy https://www.nightsharesetfs.com/nspy Has a pretty high expense ratio as it's not cheap to implement this strategy and there is no competition at the moment.

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lvl102 4y ago

The answer is simply that more than 3/4 of liquidity events occur outside of market hours. People especially academics who bring this up are idiots.

yareally 4y ago
While I tend to agree that's true (pmi, cpi, payroll, etc all happen before the market opens), it could have been worded better

snake_doc 4y ago

The Overnight Drift: https://libertystreeteconomics.newyorkfed.org/2021/05/the-overnight-drift-in-us-equity-returns/ https://libertystreeteconomics.newyorkfed.org/2021/05/the-ov... There’s a bunch of speculation on why this happens: https://www.ft.com/content/1cc17824-3077-4e39-9a99-cbccc83a2251 https://www.ft.com/content/1cc17824-3077-4e39-9a99-cbccc83a2...

kwhitefoot 4y ago

> If you invested $1 in AIG at the start of 1990 and received only intraday returns This is the problem with all stock market related articles: they all hinge on if you had done this or that. They never tell you I actually performed these two strategies and here are the results. It would be quite simple to perform such experiments but it seems that it is either never done or is perhaps kept confidential.

WJW 4y ago
In this case I'd expect the costs of trading in and out of the position everyday to be prohibitive. Even if your broker doesn't charge you anything (or you are a prop trading desk with zero trading fees), just paying the spread every day would add up quickly over time. It might not be possible to perform such an experiment at all in the real world. It's still interesting from an academic standpoint though, if only to show how long term pricing inefficiencies can persist over long time periods even in otherwise efficient markets.

tristanj 4y ago

There are several explanations for this phenomena: * The largest moves in price occur after quarterly earnings announcements, which are released after-hours. Same with other material announcements. * Prices are more volatile after-hours because there are fewer market participants. Because the order book is smaller, the same sized trade will have a larger effect on price after-hours compared to during trading hours. * Some traders at hedge funds are limited on how much $ they can hold overnight by risk management. This is because there is less liquidity and it is difficult to unload if a position implodes overnight. To reduce risk, they sell end of day, and buy back after market open. * For the above two reasons, holding overnight confers more risk, which will be rewarded by the market with higher returns. * (personal speculation): The "positive returns for holding after-hours" effect reflects the general trend of the stock market. Stocks have trended upwards for the past several decades, so the effect is currently positive. If stocks were to trend downwards for several years, I'd expect this the after-hours effect to also be negative. I have not backtested this.

Panzer04 4y ago
Night is generally just longer too, so you're taking on more risk regardless of liquidity as well (more time holding the stock, more time for good/bad news, on average you get rewarded for that risk)
logicalmonster 4y ago
Another reason is that the circuit breakers that halt wild stock movements during the day don't apply in after hours trading.
magwa101 4y ago
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evrydayhustling 4y ago
Add to all of these that the return is uninvestable, so the market cannot eliminate the arbitrage. 1016x over 30 years is a gain of less than 0.001% per trading day. You would have spent much more than this through fees and market impact to buy and sell the stock each day, especially at any real volume. The market is full of uninvestable or tiny capacity trades like this. A reliable pattern gets created by trading flows like the ones described in other replies, and it doesn't get arbed out because it is uninvestable or has tiny capacity.

beowulfey 4y ago

I haven’t seen the original source that proposed this cited here yet. Here is the explanation on ArXiv: https://arxiv.org/pdf/1811.04994.pdf https://arxiv.org/pdf/1811.04994.pdf

lisper 4y ago

It's not just day vs night that is weird but also that almost all of the divergence happened in a very short time span around 2010.

quantgenius 4y ago
The divergence in AIG occurred to a large extent in 2010. However, this effect is present for most stocks and the indices as well and has existed for pretty much as long as we have reliable data without survivorship and lookahead bias. Is it surprising to you that the effect was larger for AIG around 2010? As AIG was going bankrupt and the common stock holders were effectively getting wiped out, individuals were willing to hold AIG during the day to play crazy intra-day volatility but unwilling to hold AIG overnight because most announcements around restructuring were happening overnight. Of course at the time short sales on a list of stocks including AIG were forbidden. So even if you ignore the fact that most day traders etc prefer to play things on the long side, you have the issue that they couldn't play the short side even if they wanted to.

quantgenius 4y ago

A large trading firm, particularly one that had the capability to trade cheaply enough to take advantage of this effect would never do this simply because 50%+ of the return of a single stock is determined by the return of a common market factor. If you take a position in a long only stock portfolio, you may own many stocks but statistically, particularly if the portfolio is only held overnight, it's a large bet on the direction of the market plus some noise. So you are taking a massive binary bet that is going to go wrong anytime the market opens down. This is why most high Sharpe ratio equity trading strategies involve short selling even though equities have a strong upward bias. If you eliminate the effect of the market factor, you have a portfolio that is made up many statistically independent bets. For example, if you take a bet that is expected to make +/-1000 dollars with an equity portfolio, and it's long only, it's like tossing one coin to determine whether you make 500-700 dollars of the 1000 and then tossing coins repeatedly to determine the outcome of the remaining 300-500 dollars one dollar at a time. If the portfolio was market neutral, i.e. long and short in equal amounts, it's like you toss the coin 1000 times, each coin toss determining only 1 dollar of the outcome. If you believe the coin is biased even somewhat in your favor, as it usually is when you are trading a high quality strategy, the second option is far better. Given the kind of risk-adjusted returns achievable by a firm that could trade cheaply enough to take advantage of this effect by other means, even using relatively simple well-known strategies, doing this would hurt their risk adjusted return and the returns they could generate on their risk capital. So the odds that there is a large long-lived firm doing this to mark their book and causing this effect is likely close to 0. Others have mentioned several explanations for the effect. To this I will add one more, which I think is at least, if not more likely than the rest. Retail day-traders, some of whom are larger than people realize have a long bias, ie they are far more likely to hold a stock long than short sell it and they tend to close out their positions at the end of every day. Seems like the authors have an axe to grind more than a point to make. The paper reads like the kind of certainty a completely uninformed but (markets are made up of evil people) true-believing crusader has. To me it seems like the kind of situation where someone doesn't yet know enough about a subject to know how little they know, in this case buttressed up by the broken credentialing system we call our education system. The claim in my opinion is complete nonsense. Edit: Fixed grammar.

westonplatter0 4y ago

There are reasons. Check out Cem Karsan and his views on option related flows, ie, Vanna and Charm. https://twitter.com/jam_croissant/status/1487959533058244615?lang=en https://twitter.com/jam_croissant/status/1487959533058244615...

traceroute66 4y ago

> They say that stocks go down during the day and up at night There are lots of things "they say" about the markets, "sell in May and go away" is another famous one. Most of it pure BS, some of it is half-true, and the rest are sayings that date back to the "good old days" pre-HFT, Hedge Funds and leveraged trading. Frankly "stocks go up at night" is a ludicrous proposition. Feel free to give it a go, but corporate actions, corporate RNS, world events ....."events dear boy, events" will very happily shit on you from a great height if you think you're going to make money through short-term overnight holding. "Time in the market is better than timing the market" is about the only true saying that remains.

ChicagoBoy11 4y ago
This one, too, turns out to be incorrect. The source of this is mostly due to the fact that, in fact, if you average out over a longer time horizon, your annualized returns do in fact average out. However, what people miss is that fact that this annualization is being compounded over that entire time as well, so small disturbances to it end up having quite a substantial impact on that end result. The only REAL form of diversification is asset class, not time.

kerblang 4y ago

On a tangential note, I've been meaning to pursue a silly hypothesis that you could buy cryptocurrency low on mondays and sell high on weekends, because that's when recreational gamblers gamble most - an extension of pandemic-bubble thinking. Just wondering if anybody ever graphed it out...

olalonde 4y ago
Almost the opposite effect exists: Bitcoin returns on Mondays are significantly higher than those on the other days of the week[0]. [0] https://www.sciencedirect.com/science/article/pii/S1544612318304240 https://www.sciencedirect.com/science/article/pii/S154461231...
- kerblang 4y ago
  Ah, thanks, interesting paper > In general this strategy is profitable, both for the full sample and for individual years, but in most cases the results are not statistically different from the random trading case, and therefore they do not represent evidence of market inefficiency. Another hypothesis for the wood chipper
red-iron-pine 4y ago
interesting. got a friend working on a master's in finance, will mention this to him, has good semester project / thesis potential.

AlbertCory 4y ago

There are any number of "strategies" that appear to work. Here's one where you trade commodities based only on the day of the month: https://www.youtube.com/watch?v=3kNAYC6y0kc https://www.youtube.com/watch?v=3kNAYC6y0kc

beefman 4y ago

SSRN is down right now. Here's the paper: https://arxiv.org/pdf/2201.00223.pdf https://arxiv.org/pdf/2201.00223.pdf

paulpauper 4y ago

There are many inefficiencies still left in the market. This is what quant funds do: comb through huge troves of data to find them.

nomy99 4y ago

in a global economy wouldn't this just self regulate because of night/day cycle of earth. i.e day in china and night in usa vice versa

HardwareLust 4y ago

This is interesting, but how can I take this knowledge and practically apply it to the market to make a profit?

thedangler 4y ago

I'm still convinced the market is fake and they keep making up more rules and ways to make money because its a Ponzy Scheme ready to collapse. Filter money from the retail to the elite few. Don't get me wrong some people make money but its very far and few between and don't think for a moment they won't come after your 401ks for "liquidity" There is no real regulation. -Market Manipulation happens all the time. -Large institutions, Hedge Funds, and MM can make the market do what ever they want (within reason and time). -Cellar Boxing is real. -Latter Attacks are real. -Placing fake buy and sell order. -PFOF is a scam. -Waving your friends Billion $ margin -Using Fake funds as collateral to beat margin -Internalizing orders. -Synthetic shares... -Family Institutions -Self Reporting -Fail To Delivers can go on for years. -Manipulation real value by placing sell orders on LIT exchanges and buy orders in "Dark Pools" -0 fraction reserve lending. -Hide position is Swaps.. Which are not reported... I mean come on....