What an interesting question! Why do the stock markets even close? I wouldn’t be surprised if it were to keep the blood pressure of stockbrokers at a manageable level. Could you imagine the floor of the New York Stock Exchange if the markets were open around the clock? We’d have a coffee and Red Bull shortage on Wall Street! But in all seriousness, the stock markets close for a number of reasons. The hours of the US stock markets are 9:30 AM to 4:00 PM in the Eastern Standard time zone.
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Reasons Why the Stock Market Needs to Close
Trading can be a mentally draining activity. You have to be hyper-focused when looking for setups and plays as well as being in the trade. Stop losses can help quite a bit if you’re an emotional trader. Therefore you may wonder why does the stock market close?
To Provide Adequate Liquidity
What does this mean? The market needs to settle after they close as market makers provide sufficient liquidity that enables fair pricing. Every transaction that’s made on the market needs time to settle.
If we don’t have this adequate liquidity, the market would be a chaotic place to trade. These are more technical issues that don’t really resonate with the everyday trader. But without this, the market wouldn’t be able to function as efficiently as it does.
To Mitigate Trader Panic
This sounds funny but it’s true. There’s a reason why companies often time earnings announcements after the market closes. If investors don’t like what they hear, the liquidity is much lower after the closing bell.
Even if they sell their shares, it won’t have as significant of an impact on the stock price as if it happened during trading hours. We all know how reactionary traders are, so publicly traded companies need a time when they can drop news without the stock completely tanking.
To Give Everyone a Break!
The stock markets need workers to operate and run smoothly. It’s not just brokers who are on the floor, it is an entire army of staff that help run things efficiently. We need to give these people a break too! The stock market has become a virtual and digital entity now that we can trade from computers and our phones. We often forget that there are real live people still trading and working at the various exchanges daily.
What About the Options Market?
You might have read some headlines last year about the SEC looking into having the options market open all day. The CBOE or Chicago Board Options Exchange has opened up trading of S&P 500 options and VIX options to 24 hours per day from Monday to Friday. Unfortunately for options traders who are night owls, individual companies cannot be traded outside of normal trading hours.
Since the price of options contracts relies on the price of the underlying asset, the two markets need to trade at the same time. Broader index funds like the S&P 500 are safer to trade outside of normal trading hours since the index is not very volatile. A 24-hour options market would be absolute madness for traders and for market makers as well! So this is an answer to why does the stock market close.
What About the Crypto Market?
The crypto market is a completely different beast though. These massive trillion-dollar markets are open 24 hours per day, seven days per week, even on holidays. Why can the crypto markets stay open for so long?
Well, most cryptocurrencies are not tied to an actual business or company. Since stocks are tied to the performance of real-life companies, it makes sense that they have business hours to trade in.
But for the most part, the crypto markets are unregulated and decentralized. This means that they are available on a global scale to countries all over the world.
This is a major reason why they are open around the clock so that people in every time zone can participate in trading cryptos. If crypto like Bitcoin is truly going to become a global currency, then having a 24-hour market will help those in markets outside of the US.
If you have ever traded in cryptos, you’ll also know that the markets behave differently depending on the time of day. During our US trading hours, it is primarily North American traders.
During the overnight session, Europe and Asia are involved in crypto trading. Different trading strategies for different markets with different socioeconomic infrastructure. That’s what makes the crypto markets so wonderful!
Advantages to the Stock Market Closing
Well, every cloud has a silver lining, right? There have to be some advantages to the stock market actually closing every day. Aside from the reasons I already covered above, there are certainly advantages for both companies and traders to see the market close. As someone who follows the markets on a daily basis, I am thankful when 4:00 pm rolls around most days! It gives me a chance to unwind and enjoy other things in life.
Allows Traders to Reset
This is so important. The stock market is a great way to invest and make money, but it can be exhausting to follow the ebbs and flows each day. Particularly if you are a day trader or swing trader! Can you imagine day trading 24 hours per day? Not only would this prevent some traders from ever sleeping, but we would see a lot of accounts completely emptied. Having that 4:00 pm closing bell also limits traders from making mistakes that could be costly. Everyone always imagines making more money if the markets were open all day long. But don’t forget there are just as many bad trades that you can make as well!
Trading Near the Bell
There is actually a viable trading strategy to trading right after the opening and directly before the close. This is called Trading Near the Bell and it allows traders to take advantage of some reasonably steady patterns that take place during most sessions. If it is a green day, we often see a bit of a pullback by the close as traders take profits off the table. On a red day, we can often see a minor push before the close as traders gobble up shares at a discount. Either way, Trading Near the Bell is a strategy that can only happen when the market has set hours.
Disadvantages to the Stock Market Closing
For every advantage there is, there will always be disadvantages as well! Let’s take a look at some of the disadvantages of the market being limited to six and a half trading hours every business day.
Business Hours for the Market are Business Hours for Everyone!
For those who want to follow the markets and trade during market hours might have trouble doing so. Why is this? Well, because 9:30 AM to 4:00 PM is basically a standard workday for most jobs!
This really makes it difficult for anyone who wants to be a full-time trader or at least more than a part-time trader to work a 9 to 5 job as well! It is a minor complaint for sure. And for 95% of investors, it’s better to just leave your money in the market and let compounding and time do the work.
It Limits Other Countries from Investing in the US Markets
Here’s a big one. Even though a lot of major countries have their own local stock markets, the US markets are the biggest market in the world. This attracts investors from all over the world to want to invest in US companies. But, when you live in Asia or Europe, the US markets aren’t always the friendliest times to trade.
It can’t really be helped though, but it is still interesting to think about an all day market that residents in other countries would be able to freely trade in. It’s like why the crypto markets have become so popular in international markets as well!
Conclusion
Why does the stock market close? It’s a question that has been asked repeatedly by investors for decades now. In my opinion, these traders just do not know what they are asking for! Imagine tracking your favorite stocks all night long? I am sure a lot of traders would not be able to sleep at night. Either they wouldn’t be able to sleep, or we would see a mass sell off of names as people sell their positions before going to sleep. This would theoretically protect them from the downside of a market crash in the middle of the night!
Aside from our own sanity, the markets need to close for reasons such as liquidy balancing. There is a mechanism and method to its madness. If you really want to trade all night long, I suggest you check out some international stock markets or the crypto markets instead!
