Why Nobody Trades During Regular Hours Any More (And How Prop Funds Just Stop Trading When Volatility Spikes)

For those who follow our periodic updates on intraday stock volume, today's article by the Wall Street Journal which focuses on the dramatic decline in activity during regular working hours will come as no surprise. In a piece looking at prop trading shop Briargate (oh so witty anagram of arbitrage), founded by several former NYSE specialists, we learn that at least one firm (and likely many more) now no longer does any trading during the hours of 11 to 2. As this creates a feedback loop of inactivity, pretty soon the core of daily stock market activity will merely be the half an hour of action at the open, and the dark pool-ETF-open exchange rebalance at the very close, with everything inbetween deemed obsolete. Of course, what this will do, is create even more volatility in trading, force an even greater decline in stock trading volumes (and pain for Wall Street firms), and a further divergence between stocks and fundamentals, as momentum trading gains an even more prominent role in determine "price discovery."

From the WSJ:

On the day the "flash crash" bludgeoned the stock market and chaos swept over the floor of the New York Stock Exchange, the founders of Briargate Trading were at the movies.

Rick Oscher and Steven Rubinstein weren't playing hooky. Briargate, a proprietary-trading firm that the two former NYSE floor "specialist" traders started in 2008, is mostly active at the stock market's open and close.

In between, when market activity typically drops, the Wall Street veterans play tennis in Central Park, take leisurely lunches, visit their children's schools and work out at the gym. Dress shoes have been replaced with flip-flops, slacks with cargo shorts. Once during market hours, they walked about five miles and crossed the Brooklyn Bridge to try Grimaldi's pizza.

"We actually planned on working a full day," says Mr. Oscher, wearing a white polo shirt and blue-plaid shorts. "But from 11 to 2, the markets are pretty quiet—what's the point? As a specialist, you have to stand in your spot all day and we did that for 20 years."

Briargate—an anagram of "arbitrage"—isn't the only firm taking an extended recess during the 6½-hour U.S. trading day. Trading has become increasingly concentrated in the first and last hours of the session.

Those two hours now make up more than half of the entire day's trading volume, according to an analysis of data provided by Thomson Reuters. In August, the first and last hour generated nearly 58% of New York Stock Exchange primary volume, up from 45% in August 2005, the analysis shows. The rise of high-frequency trading, where algorithms are used to exploit small discrepancies in high-volume situations, amplifies the concentration of trading at the beginning and end of the day, analysts say.

Heavy trading in the first hour is largely due to the accumulation of orders placed by individual investors and their brokers after the previous day's close, mutual-fund activity and new strategies deployed by institutional investors based on the latest research and overseas trading, says Adam Sussman, director of research at Tabb Group, a financial-markets research firm. Meanwhile, funds that track stock indexes often wait until the final hour to execute trades to better reflect the benchmark measures' last prices.

Focusing trading on those times could limit gains, but Messrs. Oscher and Rubinstein are at peace with that. "Would you rather play tennis or make an extra $80? It's a lifestyle question," says Mr. Rubinstein, who sometimes works remotely from Florida. "I can go play 18 holes of golf and then come back and trade and that's a workday."

As for how this strategy of avoiding "noise" trading is working out, the answer is - apparently not too bad. Which can only mean that many more lazy copycats will soon emerge.

While the firm declined to disclose their returns, Messrs. Rubinstein and Oscher say they make more than they did in their later, leaner years as specialists, though not as much as they did in the late 1990s before the industry started to consolidate.

Oh and remember that selective "HFT Off" switch pulled during the flash crash? The same that many HFTs said is what helped them avoid massive losses (and which makes all their statements of providing liquidity moot)? It shows up again, this time helping Briargate avoid losses. We are confident all retail investors and readers will be able to stop trading at precisely the right moment as well (in addition to selling all their holdings at the very top of the bear market rally).

Mr. Oscher said the firm, which trades only its own money, hedges its risks "so there isn't any scenario that would move our profit and loss beyond boundaries of comfort." Briargate says it didn't sustain losses during the May 6 flash crash because it closes its books when the market tends to be volatile. "We actually had a pretty good day," Mr. Oscher says.

Indeed, with everyone not only not trading between 11 and 2, but completely shutting down when vol passes a threshold, someone please remind us what the Chicago School of Fraud case for an efficient stock market was again?