Early Dawn

With the rise of after-hours and electronic markets, the trading day has lost considerable definition. As of April 8, the start of the trading day was blurred further when the Archipelago Exchange (ArcaEx) began opening at 4 a.m. EST, rather than 8 a.m. Also, on April 18, the Nasdaq market began opening its pre-market trading session in Nasdaq-listed securities at 8 a.m.

Not surprisingly, the New York Stock Exchange has made rumblings about opening early as well. But, at this stage, they are no more than rumblings, according to an NYSE spokesperson. For now, the exchange is expected to focus on other issues - the SEC's recent approval of Reg NMS and the NYSE's proposed merger with Archipelago.

Even before the NYSE/Archipelago merger was announced, an early trading day on the NYSE floor was far from imminent. "We are exploring it," the NYSE spokesperson said of the idea of starting the trading day on the NYSE earlier. "We have no operational details or technical changes to relate. There is not much work going on with it right now," the spokesperson told WS&T.

The main push behind Arca's decision to open early came from international traders, according to the NYSE spokesperson. "We have been hearing from clients who access Arca in Europe and go through U.S. broker-dealers to access our marketplace," the spokesperson says. "There is a demand to coincide with their markets."

ArcaEx and Nasdaq also have positioned themselves to capture the volume spikes that come with early-morning news announcements that often coincide with the opening of the NYSE at 9:30 a.m. EST, when trading volume is typically at its heaviest (along with the NYSE's closing at 4 p.m.).

But there are some operational challenges to opening early, although they are considerably less dramatic for all-electronic venues than for manual venues. To address some of these challenges, ArcaEx worked closely with the Securities Industry Automation Corp. (SIAC), which runs the computer systems and communications networks that power the NYSE, AMEX and other major exchanges; the Securities Information Processor (SIP), which distributes quote information to vendors; and the vendors themselves to ensure that their systems had sufficient capacity to accept Arca's quote and post-trade streams at an earlier time. For its part, Nasdaq began user-acceptance testing of message transmissions for market participants and vendors on March 19, and "mock stocks" became available on March 28.

While regulatory and some operations staff would need to clock in earlier at electronic venues, for the NYSE and the wider listed market, the challenge of opening earlier would be more formidable. "A six-and-a-half-hour trading day now becomes an eight-and-a-half-hour trading day," notes Jodi Burns, analyst at Boston-based Celent Communications. "And because the NYSE is the primary market for its stocks, all the specialists and regionals will have to open at the same time too. This is a problem, especially for non-East Coast exchanges. For the Chicago Stock Exchange, they already start at 8:30 [local time]; now it may have to be 6:30," Burns continues. "This impacts a lot of people, and the question is if it is worth it."

Pre-Dawn Panacea?

Opening early, however, would not address many of NYSE's problems that have led to market share loss in recent years, analysts say. The NYSE has lost share to U.S. electronic venues that offer quick, anonymous executions, but this has little to do with opening times. This is, perhaps, the exchange's primary motivation for proposing a merger with Archipelago.

Moving its hours would only move the volume spike a few hours earlier, and doing so would not help solve structural problems that limit international investor participation, sources say. "It is still more expensive to buy a U.S. stock on a U.S. exchange than to buy an ADR [American Depositary Receipt] in your home country," Burns says.

In addition to the disconnect between the probable costs and benefits of opening earlier for the NYSE, the trials of running a manual market - even a hybrid market such as the one the NYSE is planning - are not likely to improve and, in fact, could worsen with such a move. "Arca can change its hours by rewriting one line of code, but I don't know how many NYSE traders want to ride the IRT at 4 in the morning," says Damon Kovelsky, analyst at Framingham, Mass.-based Financial Insights.

However, if the NYSE deal with Archipelago goes through, it provides the NYSE with a much easier forum in which to capture some of that early morning liquidity. It can simply have earlier hours on Archipelago, rather than its manual market, industry sources speculate.

When asked again about an early opening after the the announcement of the merger, the NYSE spokesperson says, "We will continue to explore this. We may at some point open earlier than 9:30 a.m., but Thain has said it most certainly would not be at 4 a.m." The spokesperson would not specify if the physical exchange would open early or if it planned to leverage Arca.

"The NYSE has talked about opening early, but ... extended hours have not been tremendously popular," says Larry Tabb, CEO of The Tabb Group. "The liquidity is spotty and the pricing tends to be all over the place. While they may open the floor an hour or so early, I would doubt they would open it any earlier than that," he adds. "As for Arca filling that role, it makes a lot of sense."

Now that the NYSE may merge with Arca, the NYSE "will probably pursue an early open on the e-platform," Celent's Burns' adds.