Robinhood After Dark
Robinhood Markets Inc. shares jumped as much as 28% after announcing plans to extend the trading day for customers by four hours.Trading will run from 7 a.m. to 8 p.m. New York time, a step toward offering 24-hour equities investing, the Menlo Park, California-based company said in a blog post Tuesday.The shares rose the most since August on the news and were up 24% to $15.85 at 11:22 a.m. in New York.“Our customers often tell us they’re working or preoccupied during regular market hours, limiting their ability to invest on their own schedule or evaluate and react to important market news,” Robinhood said in the blog post.
Traditional market hours run from 9:30 a.m. to 4 p.m. and Robinhood already offered extended trading starting at 9 a.m. and ending at 6 p.m. There’s reason for Robinhood’s 22.7 million customers to be wary of the change, however. Extended-hours trading come with risk, including lower liquidity (or opportunities to buy and sell) and the potential for higher volatility, which could lead to customers getting a worse price than in market hours.
“Robinhood is working towards offering 24/7 investing,” and if that works out I suppose that the real Robinhood action will be even later at night, once the Scotch really kicks in. (To be fair, presumably this will also be aimed at non-U.S. investors trading U.S. stocks during their daylight hours.)
Robinhood’s stock closed up 24.2% yesterday on this news. There is something a bit odd about that. “TD Ameritrade is letting retail investors trade 24 hours a day, five days a week, and the brand has enlisted Lionel Richie to help tell the story,” it says here, in an article from 2018 about a Super Bowl ad for TD Ameritrade’s all-night trading session. (Here’s the ad.) That is limited to exchange-traded funds, though, not single stocks. But the 7 a.m. to 8 p.m. trading day for U.S. stocks seems pretty standard at retail brokerages including TD Ameritrade, E*Trade, Fidelity, Charles Schwab and Interactive Brokers. Robinhood offered shorter trading hours than its competitors, and now it is catching up, and its stock is up 24%.
I suppose one way to read the price move is that the market thinks that Robinhood, unlike its competitors, is really good at influencing its customers’ behavior, and at getting them to trade more. 2 TD Ameritrade hires Lionel Richie to pitch all-night stock trading during the Super Bowl, and its customers shrug and continue trading on their lunch breaks. Robinhood puts out a blog post about after-hours trading, and its customers say “well now I know what I’m doing between 6 and 8 every evening!” Other brokers try to satisfy customer demand for extended trading, even if there isn’t very much of it; Robinhood creates its own demand.
One more point about the extended session: The way this will work is not exactly that the dentists will trade stocks back and forth with each other at 7 p.m. The way this works is the way that Robinhood trading works anyway: Its customers will put in orders, and Robinhood will route those orders to a handful of big market makers (Virtu Financial Inc., Citadel Securities LLC, G1X Execution Services LLC, Two Sigma Securities LLC, etc.), and those market makers will fill those orders from their own inventory or execute them on an exchange or dark pool. In general, during the day, the market makers will fill the orders at a price that is at least as good as the “national best bid and offer”: If you’re buying stock, the market maker will sell it to you at either the lowest available price on a public stock exchange, or a slightly lower price. They do this in part because of Robinhood’s legal obligation to give you “best execution” on your trades, but also because of a thicket of other rules (called “Regulation NMS”) regulating the routing of orders and the priority of the best price.
After hours, when the exchanges are closed, or closed-ish, all of this is a bit more relaxed. There are still best execution requirements, but the Reg NMS rules about the national best bid and offer apply only during “regular trading hours.” 3 There are fewer public quotes on public stock exchanges, and fewer traders and market makers quoting the stock; market makers will have to build their models of what the right price is based on more limited data. During the regular trading day, there are very visible prices and fierce competition to make those prices as tight and accurate as possible. At night, who knows! Spreads will presumably be wider, 4 and people who complain about Robinhood selling its orders to market makers will have more to complain about.