Here's a discussion of the same phenomenon that provides some explanations that aren't "a shadowy trading firm is propping up prices by painting the tape at open":
https://systematicindividualinvestor.com/2021/01/15/the-magi...
To be honest, the author's strategy could really be happening: some market player (or players) may be aggressively buying up stocks at open and selling them throughout the day at a loss so that the overnight gains positively impact their much larger buy-and-hold tranche of the same stocks. So what? Not only would they be taking on a risk premium by holding that larger slice of stocks overnight, but they're also opening themselves up to massive tail risk. A strategy like this works by taking advantage of the change in order book depth throughout the day to pump up P/Es. P/Es will eventually come back down. When that happens, who knows whether the crash'll start during a trading session or overnight. It reduces into a market timing strategy. This "paper" is ridiculous.
Only Bruce knows the truth!!!
/s
The suggested explanation is: buy orders are placed before open, raising opening price. The gains on the holdings are then larger than the cost of buying in the opening, and selling during the day.
There are lots of firms and funds and floors that never hold overnight, but this research demonstrates that that is basically a statistically losing strategy. If you follow markets it's almost impossible to not notice that almost all the real action happens after hours, and the day's trading tends to "erase" whatever happened overnight. Bruce's research is hard to contradict, unless the data is wrong or his formulae or off.
And if you were to hold overnight, you'd have to sell in the morning, and the volume of overnight trading isn't high enough to support a bunch of big firms buying into overnight trading and selling at open, they'd all sell into a disaster, which would make overnight returns go away?
TL;DR: Stock prices in the US go up overnight and come down during the trading session. The only explanation must be that some shadowy trading firm with a lot of money is buying a bunch of $stock in the morning and selling it back later in the day (at a loss), because it inflates the value of their much larger stockpile of $stock that they hold onto overnight.
Savage.
I saw lots of charts & graphs & flashy wordsmithing, but I didn't actually see any evidence or examples of firms doing unscrupulous trades.
I'm not an expert, but I know better than to dish it out better than I can take it. My opinion is that these "exemplary" market returns are simply the result of markets being open only part of the day: between 0930h and 1600h there's liquidity to buy/sell your position at any time, for the prevailing price. Markets are open only 7h of the day but 24h worth of events takes place each day.
The other elephant in the room is that all market participants know the trading hours. Much news, releases, events, etc. happen outside of the liquid trading hours, resulting in discrete jumps between the close of one day and the open of another.
These are also cumulative returns over a huge timespan: everybody knows the fed can crash the markets mid-day with the wrong jawboning. the reverse price effect can also be true, resulting in huge open-to-close changes.
Yes indeed. The author claims that there is less risk in overnight positions than in intra-day positions. I think there's more. Firstly more time passes overnight and secondly the lack of liquidity means you can't unwind overnight positions if you need to.
The first page suffices to get the idea.
Assuming his assertion is correct, the reverse is also a strategy. Selling in the morning, causing prices to drop, then buying back when they are cheap in the afternoon, so ending flat but having made money.
So anyone that buys and then sells or sells and then buys makes money. This is easy! What could possibly go wrong?
My knowledge of this is maybe limited, i've not worked as a quant, but i've stared at a fair bit of market data having written feed handlers for a fund.
These images... do not render well on my machine, to put it lightly. So they look remarkably similar to me. Perhaps the author could spell out what this difference is? There is eventually mention of "striking similarity in the overnight and in- traday return patterns in the indices around the globe," but I don't think I'm ready to conclude that strong correlation of phenomena across markets in a global economy must be caused by a collection of manipulators acting on all of those markets.
I'm curious to see what others have to say, since I lack the hardware and background to properly read this document.
Manipulation, such as gapping the price higher or lower to make profit from options or increased liquidity of regular trading hours. So you spend $10 million in the pre-market hours to make a stock open 5% higher and then use the extra liquidity to unload a $100 million position at the open while also selling calls.
Now, we still maintain that for some markets. I'm guessing its a combination of laws, inertia, and the ability to do outside of RTH news/sys updates.
Some markets are open much more than the 9-430 stock market - for example futures markets open sunday night.
crypto markets don't have this issue and are open 24/7
A lot of trading takes place in the last 30 minutes of the day for that reason.
An interesting result -- but not worth the hot air.
Renaissance Technologies' Medallion Fund?
Simons is a genius.
https://www.reuters.com/business/finance/renaissance-executi...
He is saying that some firm own lots of $stock that they buy-and-hold. They then buy smaller amount of $stock early in morning to cause a swing up in price. Over course of day, the ability to influence price declines, so they can sell the amount they just bought without influencing price as much. Sell for profit or loss, doesn't matter.
The root goal (how they make money) is that they should have influenced the price enough that the large buy-and-hold stock they own has increased in value. Specifically, they want the "overnight" price change to be more positive than the decline across the day (again, by pumping up the morning price). They don't have to buy/sell, its more the value of their holdings are higher.
HFT uses energy as a means to an end (i.e. computation), while proof-of-work mining has an incentive structure that directly rewards energy expenditure. In other words, one is energy- (and hardware-)bound, the other isn't.
As a thought experiment: If fusion energy and self-replicating nanobots were to become viable tomorrow, how would that impact HFTs and proof-of-work mining, respectively?
The main reason being is that they are all co-located with the exchange, and the byzantine fault tolerance is completely side stepped by the exchange having a single point of serialization between the HFT participants and the matching engine. And then just ensuring everyone has the same length cables to that single point of serialization.
So the policy of everyone connects through this single point, solves the fairness problem.
And then the fault tolerance is often just solved by having an active standby architecture, so if the primary matching engine goes down, you fail over to the backup.
You would be surprised at the low number of servers actually in the primary path for financial exchanges.
This paper reads more like some click bait article on BuzzFeed or Business Insider than an academic piece.
