By Paul Cottee, Director, Regulatory Compliance, NICE Actimize.
Are we soon to face a market with 24-hour a day derivatives trading? It might well be coming sooner than we think. Currently, the ongoing debate in the US derivative markets has been significantly influenced by the recent proposal issued on April 21 from the Commodity Futures Trading Commission (CFTC.) This proposal, recently seeking public comment on the potential of 24/7 trading and clearing for listed derivatives, reignited the discussion on the benefits and drawbacks of continuous trading with breaks only on certain public holidays.
As an ongoing topic of debate, this is certainly not the first proposal to suggested altered trading hours. All major US equity exchange operators have recently floated the idea of 24/5 trading, allowing continuous operations from Monday to Friday on a number of occasions. As it currently stands, numerous futures exchange operators around the world offer near-continuous trading five days per week – including the Chicago Mercantile Exchange Group (CME), with some CME contracts tradeable for up to 23 hours per day from Sunday afternoon through to the close of business on the following Friday. However, this CFTC exploration goes further, challenging market participants to imagine trading without pauses and to address the complexities such a model would entail.
There are significant benefits of continuous trading, despite any potential challenges. Those in favor of extended trading opportunities often highlight the ability to respond in real time to geopolitical events, which in this climate is certainly a clear benefit. In a 24/7 US derivatives market, investors and risk managers would not have to wait for the Globex market to reopen on Sunday afternoon to react to market-critical developments, leading to greater stability during turbulent times and offering reassurance to market participants. However, the full positive or negative implications remain uncertain and will only become clear over time.
What the Regulators are Saying
The CFTC’s Request for Comment (RFC) raises critical questions about system resilience, market integrity, and regulatory compliance under a continuous trading model. The RFC noted that there is a need for robust surveillance systems to combat abusive trading practices like front-running, wash trading, and other manipulative activities.
The RFC statement explained that maintaining resilience through governance frameworks, adaptable exchange staffing models, and advanced technologies to ensure compliance with the Commodity Exchange Act and Commission Regulations were necessary. The statement also called for technology and capacity planning, observing that developing surveillance systems that detect anomalous activities under varying trading conditions and liquidity levels were critical. Finally, the RFC statement suggested that coordination across service providers would be required, referencing the necessity to manage operations during thinly staffed hours, including collaboration with service providers and other third parties.
In U.S. equity markets, the trend is clearly towards extended hours: the SEC recently approved a new exchange to (eventually) have extended hours, and other market operators have indicated a desire to extend their hours subject to regulatory approval; however SEC Commissioners share the CFTC’s concerns with respect to infrastructure challenges which need to be addressed before systemic 24/5 trading could begin. Under U.S. regulations, there is no blanket ban on extended-hours trading in equities (that is, outside the regular hours of 9:30am – 4:00pm US ET), subject to FINRA’s risk-disclosure requirements, such risks including the fact that there is (usually) less liquidity than during regular hours, and pricing might be worse as there is no National Best Bid and Offer (NBBO) price outside regular hours. Further, some brokers and venue operators already offer out-of-hours trading in related products such as ETFs, and others are looking to expand their offerings.
Implications for Market Participants
While the CFTC’s initiative is still in the exploratory phase, its call for public input, coupled with equity exchanges’ previous proposal of a 24/5 model, signals a clear shift in continuous trading. This move would require members of the US derivatives trading ecosystem—designated contract markets (DCMs), swap execution facilities (SEFs), and beyond—to start adapting their operations to align with this potential industry shift.
Although implementation may seem to be years away, the noise surrounding this concept suggests that it may no longer be a question of “if” but “when.” Stakeholders should begin preparing for a world of nonstop trading and clearing, ensuring they are ready to tackle the challenges and opportunities this bold move might bring to the markets.
Compliance teams are already grappling with budgetary constraints and increasing workloads, and a proposed change of potentially- extended or continuous trading hours would only add to existing departmental challenges. There would need to be contingencies for hiring additional staff to cover the extended hours, as well as increased monitoring and surveillance requirements in consideration of the potential for increased risk exposure due to the longer trading day.
To offset these current challenges and prepare teams for future scenarios, many financial institutions have begun leveraging advanced financial markets compliance solutions to analyze growing trade volumes and trade-related communication. End-to-end compliance solutions offering Holistic Conduct Surveillance, Communication Surveillance, and Behavioral Insights permit teams to automate tedious analytical processes that can lead to bottlenecks and inefficient compliance programs and are among the technologies being considered for this potential update.
As we embark on a transformation in global finance, the future of continuous trading in listed derivatives presents both opportunities and challenges. Whether this development proves beneficial will depend on the solutions and safeguards which could arm the US derivative markets against any drawbacks of continuous trading.
System Resilience – What Do We Need
As the financial services industry prepares to transform toward continuous trading in listed derivatives, this development presents significant opportunities and challenges. This shift’s ultimate success and impact will depend heavily on the safeguards, solutions, and regulatory frameworks implemented to support it and the guidance that the industry brings to address all of these in a seamless approach to a heightened trading scenario.
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