“Light exchange” Blue Ocean brings 24/7 equities trading closer to reality
Friday, February 3, 2023
By Michael Shari
Market-shifting crises can break out at any unpredictable moment, but stocks trade in fixed hours. In the U.S., stock exchanges open at 9:30 am and close at 4:00 pm. Although pre-session trading commences at 4:00 am, and there is a four-hour post-market window, there remains an eight-hour gap when investors can’t act on perceived risks or opportunities.
Alternative trading system operator Blue Ocean Technologies targeted that very opening with a “light exchange” that went live in October 2021, handling trades between 8:00 pm and 4:00 am New York hours for clients in any time zone. It is a still-evolving glimpse into round-the-clock stock trading, a vision from the dot-com and day-trading booms of the 1990s and early 2000s that never took hold, despite earlier strides in that direction by derivatives markets and, more recently, by 24/7 cryptocurrency exchanges.
“It gives you the ability to manage your risk real-time,” says Brian Hyndman, Blue Ocean’s president andCEO since May 2022. “If there’s a geopolitical event happening around an election on Sunday night, and the markets are moving, why would you want to wait until 9:30 in the morning to be able to make a trade?”
Founded in New York in 2019, Blue Ocean adopted what Hyndman terms a “follow-the-sun model,” mainly serving broker-dealers in Asian market centers who “want the ability to trade U.S. stocks, one of the most transparent and liquid asset classes in the world, during their daytime hours.”
A major step forward was a strategic partnership announced in February 2022 with Samsung Securities. Another was launched in October with Mirae Asset Securities (USA). They became the only firms able to trade U.S. stocks during Korean daytime hours.
The Samsung relationship “cemented our presence in South Korea and provided visibility to our services, connectivity and data,” Hyndman wrote in a January annual review letter. “We continue to drive new users globally to participate in trading U.S. equities, and our goal is to grow our expansion within the entire Asia-Pacific region.
“To date,” he continued, “we have experienced an average 37% month-over-month increase and are optimistic about our future traction.” He also credited connectivity and data partnerships such as with Broadridge Financial Solutions’ NYFIX order-routing network, Transaction Network Services’ (TNS) global points of presence, as well as Refinitiv, Activ Financial, Intercontinental Exchange and Raptor Trading Systems.
The timing was fortunate for both Blue Ocean and Samsung Securities. The latter reports that Korean retail investors’ U.S. stock trading volume surged from $25 billion in 2019 to $155 billion in 2020 and $320 billion in 2021.
Local Samsung Securities clients didn’t have to wait to react to Russia’s invasion of Ukraine on February 24, 2022, when the Nasdaq Composite Indexswung from 3% down in the morning to 3.3% up at the close. “Our clients were able to respond to the issues before the U.S. regular market open,” says Samsung Securities spokesperson Sangjin Park.
“People want to trade” 24/7/365, says Blue Ocean’s Brian Hyndman.
Blue Ocean is also taking advantage of the fact that overnight trading historically has outperformed regular-hours trading while encountering less volatility on a risk-adjusted basis. When the markets were sliding in the first half of last year, the stocks in the large-cap equity SPDR S&P 500 ETF fell by 11.06%, with 14.74% volatility, in daytime, according to a study by AlphaTrAI Funds based on opening and closing prices. In night trading over that period, those stocks declined 10.04%, with 9.38% volatility.
There are, however, risks that Blue Ocean’s model can’t itself address. Clients can be hurt by stock-price moves during the two-day (T+2) settlement cycle for U.S. equity trades. And because the platform is now open five days a week, from Sunday to Thursday, “we’re not solving the over-the weekend problem just yet,” Hyndman concedes.
The platform currently trades about 2 million shares a night. Hyndman is mapping expansion in the pre-trading and post-trading markets, which he projects will boost the daily share volume to 15 million to 20 million by the end of November. That’s based on estimates that 700 million shares are traded per night in the pre-trading and post-trading hours across the U.S., and “we think we can expand upon that and grab some of that share,” he says.
As a market technologist who has worked at alternative venues and as a Nasdaq senior vice president – he was at Nasdaq for more than a decade after its 2004 acquisition of the BRUT electronic communications network, where he was president – Hyndman has long been a proponent of 24/7 trading. The idea didn’t fly when he tried to sell it on Wall Street: “The Morgan Stanleys and Goldman Sachses of the world said, 'Listen, I just want to go home at 5 or 6 o'clock. There's no need to trade 24 hours a day.'”
Before he joined Blue Ocean in 2021 as president and chief operating officer – reporting to then CEO, now executive chairman Ralph Layman – Hyndman spent three years as an advisor to Paxos, the institutional digital-infrastructure company that started the itBit cryptocurrency exchange and owns New York State-regulated Paxos Trust Co. It promotes a blockchain-based model for mitigating settlement risk which the Securities Exchange Commission approved for pilot testing.
Is the Industry Willing?
“The world has changed a lot,” Hyndman says. “Now people want to trade 24 hours a day, seven days a week, 365 days a year.”
The question is if, how and when Wall Street might go along. The U.S. securities industry has a major operational project in progress, with international implications: to shorten T+2 settlement to T+1 by sometime next year.
“The amount of investment which every firm would have to make in 24/7 trading – and the risk that would come out of it – would be much more than what we have today,” says Vinod Jain, a strategic advisor with Aite-Novarica Group in Boston.
There are critical questions to be addressed, he says: “If it goes over a 24/7 cycle, how would you close your day? Either you have made a profit on that day, or you have made a loss on that day. You need a closing price [with] which to close your books.”
If trades anywhere can move U.S. stock prices at any time, “is it gamifying investing?” asks Tayfun Icten, senior vice president of New York-based alternative-assets platform iCapital. “Investing could become so simplified, and so efficient, that people would just be playing games.”
On the other hand, speaking at a Security Traders Association conference last October, Robinhood Markets chief brokerage officer and former TD Ameritrade executive Steve Quirkpredicted that 24/7 stock trading would be commonplace within five years.
“The technology exists today,” Hyndman asserts. “We’ll get there. It’s just going to take more time.”