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Trading Stock Around the Clock?
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15263 |
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Section : |
CURRENT ISSUES
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8 / 1989 |
2,890 Words |
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William C. Freund
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There is really nothing novel about the notion that the world has shrunk, united by modern technology and satellite communication. After all, Wendell Willkie wrote his book One World over forty years ago.
In the world of finance, the concept of one world is rapidly becoming a reality. Each morning, U.S. newscasters report how the stock market closed in Tokyo and opened in London. Morning breakfast would not be complete without a report on the international exchange rate for the U.S. dollar and the price of gold in various international financial centers.
Investors in stocks were well in the way to becoming world citizens when the October 1987 crash struck. According to the U.S. Treasury, foreigners bought and sold $278 billion in U.S. stocks in 1986 and $360 billion between January and October 1987. Similarly, U.S. investors traded over $100 billion in foreign stocks in 1986 and $142 billion in the first nine months of 1987.
Most of this trading was done by institutional investors who dominate stock markets around the world--insurance companies, pension funds, mutual funds, and banks. By trading across their own borders, they hope to achieve higher returns or lesser risks in their portfolios.
The 1987 stock market crash, which started in the United States and spread across world markets at lightning speed, set back the internationalization of stock trading. As institutions licked their wounds, they cut back their trading not only domestically but internationally. The internationalization of stock trading, however, has suffered only a temporary setback. It remains a fundamental trend in a world of high technology and low-cost communications.
A recent example should dispel any doubts that international stock trading has become feasible and cheap. For some years, the Toronto Stock Exchange has boasted a working and efficient electronic system for trading stocks. The Paris Bourse, on the other hand, was afflicted with an old and inefficient system, created more than a hundred years ago in the age on Napoleon. The Bourse decided to modernize its market to respond to the new heat of international competition. It bought Toronto's automated trading system with the provision that Toronto would install it. Not only did Toronto install the system but it ran the Paris Bourse via satellite for a period of six months, by which time Paris was ready to administer it. Technology and low-cost communications made it possible!
A major problem with international stock trading is the disparity of trading hours. When the New York Stock Exchange (NYSE) opens at 9:30 in the morning, London is finishing lunch and has only a few hours of trading left; Tokyo has already completed its day. By 4 o'clock in the afternoon, when the NYSE closes, London is getting ready to go to sleep.
As a result, an institutional investor who wishes to trade a large block of stock in New York has to hold his order for the NYSE trading day to begin. Since economic and other news changes quickly, there is always a risk in holding an order. As a result, there is some pressure on exchanges to extend hours beyond their normal trading day. With electronic trading, it is possible to think about around-the-clock
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