More Time To Trade Isn’t a Good Thing for Many Retail Investors

Until recently, unless you worked on a trading floor, making your own stock deals wasn’t easy. “When I started 20 years ago, I used a dial-up connection and paid $17 per trade, which meant I thought long and hard before each one,” recalls Ed deHaan, a professor of accounting at Stanford Graduate School of Business. “Today, you can trade for free with the swipe of a finger before you’re even out of bed in the morning.”

Trading is potentially going to get even easier for retail investors. Currently, U.S. stock markets are open weekdays from 9:30 a.m. to 4:00 p.m. Eastern time, and trading outside of these hours is minimal. But several trading platforms, like Robinhood, would like to see the market open 24 hours a day.

Proponents of this idea describe it as a way to level the playing field for retail traders, the general population of non-professional stock buyers. But new research by deHaan and Andrew Glover of the University of Washington finds that retail traders sometimes benefit from not having unfettered access to the market. People who have narrower windows of time to trade tend to have better-performing portfolios, suggesting that longer market hours could hurt the average retail trader.

“If people are making transactions that aren’t in the best interest of their financial health, then barriers to entry are actually useful,” deHaan says.

Go West, Retail Trader

To study retail traders with different levels of access to the market, deHaan and Glover landed on an innovative solution using the continental United States’ four time zones. They gathered tax data from 2010 to 2019 for households in 208 counties directly adjacent to a time-zone border. This allowed them to compare capital gains and losses between essentially identical populations with slightly differing degrees of access to the market.

The researchers’ intuition was that market access would decrease as traders move west, as the opening of the market shifts from 9:30 a.m. on the East Coast to 6:30 a.m. local time along the Pacific. The market also closes “earlier” for westerly traders. Importantly, the market usually surges early in the trading day, with roughly 13% of daily trading volume occurring in the first 30 minutes of its open.

Yet the retail traders who don’t take part in this morning rush do not appear to be missing out on good deals. “People who are more likely to miss morning trading, on average, do better,” deHaan says. He and Glover find that as you move west across each time zone the median trader sees a 3 percentage point increase in capital gains, or about $400 per year more than a trader in the time zone directly to the east.

“The long and short of what we find is that, though people who live on either side of these borders are functionally identical in every way we can observe, as you cross over time zone borders to the west, portfolio performance improves,” deHaan says.

Time Is (Less) Money

These results apply to people in middle-income brackets. The wealthiest retail investors see no losses based on trading hours. In this detail, deHaan says, lies the significance of the findings. While a 3 percentage point loss in one year may not greatly concern a trader, added up over decades such losses can make a significant dent in their retirement savings.

“And this is exactly the point: If these losses were really big, people would probably learn from their mistakes,” he says. “The fact that the losses are small means they persist — but small and steady adds up quickly.”

The researchers don’t go so far as to make policy recommendations based on these results. While the findings demonstrate financial losses among those with greater market access, they don’t speak to “broader welfare implications,” as deHaan puts it. People may incur losses, but they may also benefit in unobserved ways, like taking pleasure in the process of trading and the game-like competition of trying to beat the market.

This study still provides three basic takeaways. First, if retail investors lose more during morning trading, as they seem to, then they will likely be hit even harder if stock exchanges are open at all times. “If retail traders are getting damaged between 9:30 and 10 in the morning, then they’re really going to get hurt at 2 a.m., when markets are more volatile and stock spreads are even larger,” deHaan says.

Second, if retail traders don’t want to lose money, these results add to the large body of evidence that the average investor should not actively trade in single companies or cryptocurrencies. Instead, they should invest in cheap and diversified exchange-traded funds. That may be less exciting, but it is a more reliable source of steady returns.

Finally, if people do want to make their own stock trades, then they should treat their investments as they would treat money at a casino. “You need to be comfortable losing it,” deHaan says. “In situations like this, people are susceptible to all sorts of behavioral biases that are very difficult to identify, and even more difficult to overcome.”