Saturday, October 11, 2008

Why Do Financial Markets Close for the Weekend?

Since time immemorial, nature has never stopped to rest on weekends, and neither has man—or humans, in these politically correct days. Even today, after the ecumenical Christianification of the temporal rhythm of human activities, manufacturers and service providers are open for business, and tractors and fishing boats are at this very moment braving the elements to keep us fed. So why should securities exchanges close down two out of every seven days, when investor sentiments can change overnight due as the result of boons and calamities real and imagined?


Janne Morén said...

More important, why do markets close for the night, just when their counterparts are open and greatly affecting their own future trades? With weekends, at least everybody are closed at the same time.

Sophie said...

Because you cannot be irrational and stressed 24/7. We leave our economy in the hands of young, irrational, bipolar people who must try to rest from time to time.

Janne Morén said...

Police and firebrigades, restaurants, convenience stores, hospitals - lots of businesses manage to stay open 24/7 more or less indefinitely, even with salary levels much lower than in the financial sector. And you can't really argue that market activity on an individual worker level is higher-stress or more important than, say, emergency intake triage.

Jun Okumura said...

Sophie, Janne, here’s my take. I don’t think that a securities firm can recruit a sufficient number of capable traders and their support staff to work the night shift on Wall Street or one of those irregular 12, even 8-hour shifts like some taxi drivers do. However, since the traders are only sitting in front of their computer screens, there’s no law of physics that says that some of them cannot be located in, say, Tokyo and London to work normal 9-to-5 (or whatever) dayshifts that add up to round-the-clock coverage. In fact, I think that globally traded instruments such as, say, Dow Chemical shares and U.S. government bonds are already being bought and sold all day.

I think that the real problem lies in jurisdictional issues. It is my guess that a transaction at a stock exchange located in country A that is conducted at least in part in country B creates a major jurisdictional problem. The government of country A will not be able to fully exercise its regulatory authority in country B while the government of country B is likely to consider the stock exchange to be operating in its jurisdiction without permission.

As I mentioned before, this is not an everyday problem for globally traded instruments. But there are substantial compliance costs to listing in multiple exchanges. If, say the U.S., Japan and the U.K. could get together and form a jointly administered regulatory regime for trilateral stock exchanges, that would solve the main legal obstacle to 24-hour trading. I am sure there are other legal issues, but they can be worked out in the form of a treaty and its supplementary agreements and domestic laws and regulations.

The initial question, regarding weekends, is problematic, but a couple of other capable jurisdictions, perhaps a Moslem country or two, that can bridge at least some of the weekend gap may be induced to join the alliance.

All this, of course, entails operation costs that may outweigh the returns. Unless there is sufficient 24/7 demand for transactions, governments will not get together to set up a jointly administered regime and securities firms will continue to prefer to work through local branches and subsidiaries that meet the demand in the respective markets. Then again, a the hectic activities aimed at containing the financial meltdown suggest that it is the administrative authorities that need that weekend break.