1. Prior day trading4 - This activity occurs between 8:00PM and midnight. They are reported via “Prior day messages” and go to the SIP typically around 8:00AM, but are reported with a special message type that is not reflected in most data feeds. Trades that execute on non-business days, such as Sunday night, are not reported to the SIPs.
2. Pre-SIP activity - Trades that take place on days the market is open between midnight until 4:00AM. These trades are typically reported shortly after 8:00AM to the SIP.
3. Pre-core - Extended hours trades reported as they happen,5 between 4:00AM until core trading starts at 9:30AM.
4. Core - Regular trading hours, reported immediately from 9:30AM until 4:00PM (1:00PM on early-close days).
5. Post Close - Extended hours trades reported immediately to the SIP from 4:00PM until 8:00PM.

Stocks trading under $1.00 remain a major distorting factor in the U.S. equity market. Year-to-date6 sub-dollar volume accounts for 13.5% of core hours trading volume. Overnight trading looks very different - year-to-date sub-$ overnight represents just 2.7% of the market, ranging between 1.5% in March to 5.4% in January. The trend has recently been increasing since March’s low across all times of the trading day.

The relatively low share of sub-dollar volume during the overnight period may come as a surprise to some market followers, as sub-dollar stocks are purported to attract significant retail interest and one ongoing assumption has been that much overnight trading is retail-driven. While at least one academic paper7 suggests that overnight market quality is reasonable overall - for frequently traded stocks, volume-weighted spreads are 28 basis points versus 20 during core hours - that paper does not focus specifically on very low-priced stocks. As is standard academic practice, sub-dollar trades were excluded. We suspect the better spreads reported by the paper are driven by uber-liquid securities. When the authors calculated these statistics for all non-sub-dollar stocks, volume-weighted spreads expand to 89 basis points. Sub-dollar spreads are likely even wider, dampening trading in those stocks.

A second factor in the low sub-dollar activity is the heavy concentration of ETP trading in the overnight period as ETPs rarely are priced below $1.00. The next section provides further detail on this phenomenon.

As the sub-dollar chart shows, trading activity varies widely from week to week. We divided the market into four groups:

We created these breakouts because ETPs represent a much larger share of overnight trading - 61% vs 21% during core hours. ETPs are only 14% of SIP extended hours trading. To the degree that single stock ETPs represent an extension of their underlying securities, it is also informative to break out these products. Leveraged ETPs have also shown periodic strength this year amidst recent periods of volatility.

Weekly common stock share ranged between 21% and 62% of overnight volume, single stock ETPs between 3% and 42%, and leveraged ETPs (excluding leveraged single stock ETPs) between 7% and 45%. Common stock share fell sharply from December through March but has been climbing since then. Notional common stock share has been fairly steady this year, while single stock and leveraged products are less of a factor. (see bottom half of Chart 3)

We took a deeper dive into some individual dates to see if we could find any consistencies in the stocks that trade around certain events. For example, we find that on the dates around U.S. Fed decisions, leveraged U.S. equity products produced high volumes as did bitcoin and individual stocks that are seen as impacted by interest rates.

On other days, U.S. fixed income ETFs were dominant, as well as ETFs focused on Asian markets. Earnings announcements also showed an impact on overnight trading, although stocks that normally are not heavy night traders, only garnered minor additional volume.

Overnight volumes tend to be top-heavy. On average, the most highly traded security executes more than five times as many shares as the sixth ranked stock. Two common stocks are among the ten most likely to rank in the daily top five, although no common stock averaged ranking in the top 5 even 60% of all days in our sample. Either leveraged single stock or other leveraged ETPs were most likely to rank in the top five traded on any given day.

Overnight trading remains far less active than extended hours trading. The hour with the highest overnight volume is 9:00PM, which averages 2.94 million shares per day and coincides with several Asian market opens. This volume is a fraction of the last hour of extended hours trading, which averages 43.22 million shares. The first hour of pre-core reported volume averages 113.30 million shares per day.

Overnight executions, in addition to the peak in the 9:00PM hour, also exhibits a smaller peak at 3:00AM, of 2.35 million shares. This coincides with several Asian bourses’ end of their regular trading day.

We see significant variation in the securities that trade throughout the night. During the 9:00PM hour, ETPs excluding single stock and leveraged products account for more than half of the volume (60% notional). This drops to less than 12% for the last three hours (21% notional) before the SIP lights up at 4:00AM.

Single stock ETPs account for more than 20% of the volume for most of the first five hours after the SIP shuts down, while leveraged products jump around midnight, and average more than 25% of market volume and capture more than 1/3 of the volume between 1:00AM and 2:00AM.

These results diverge significantly from core hours trading, where nearly 80% of all volume is in common stocks (73% notional). During core hours single stock ETPs account for just 3.5% of the volume (1% notional), leveraged ETPs 5.2% (3% notional) and all other ETPs 12% (23% notional).

Overnight markets remain illiquid, with most days attracting trading in less than 2,000 ticker symbols. This reflects various constraints of today’s market infrastructure. For example, ATS’s generally prevent trading in stocks that have corporate actions to prevent confusion around ticker symbol changes, splits and other changes to a security.

With the major U.S. equity markets agreeing to an outline for overnight trading, which would include robust application of corporate actions and other market infrastructure elements, the opportunity for more widespread activity is substantial.

Our review of the current overnight landscape helps point exchanges and brokers to the need for education on both the current state of the market as well as its potential, once U.S. exchanges, the SIPs and DTCC begin near 24-hour trading in the likely not-too-distant future.