Understanding the Regulations of 24-Hour Trading

With markets becoming increasingly global and technological advancements continuing to accelerate, 24-hour trading is rapidly becoming mainstream. Once limited to relatively niche markets, even major exchanges are making the switch: The Nasdaq plans to expand its trading sessions to 24 hours per day, five days per week, by 2026.

This shift brings new opportunities for traders, but it also introduces risks, including complications that make it challenging for regulators to enforce investor protections. Let’s explore what you should know about the regulatory landscape of 24-hour trading, including how it works today and how it may change in the future.

The Complexity of 24-Hour Trading

While traditional markets shut down for a portion of each day, 24-hour markets stay open around the clock, allowing you to buy and sell assets at any time. The limitations of physical trading floors and regional business hours once made this impossible, but modern advancements—like electronic exchanges and blockchain technology—have made continuous operation increasingly feasible.

Initially, 24-hour trading was limited to a handful of globally traded asset classes, like foreign exchange and cryptocurrency. However, it’s quickly becoming the new standard, even for stock exchanges.

This is largely due to the fact that 24-hour markets support participation from investors across the world, increasing overall liquidity and trading volume. In addition, it gives investors the flexibility to react to breaking news across the world—such as economic data releases and geopolitical events—in real time.

All that said, 24-hour trading also comes with some significant risks for investors. Most notably, that includes temporary periods of lower liquidity and higher volatility during extended market hours, as well as increased regulatory challenges.

Risks Associated With 24-Hour Trading

While 24-hour trading typically raises the total number of market participants, it also creates off-peak hours during which the actual number of active traders drops. During these periods, liquidity actually decreases, resulting in wider bid-ask spreads.

When even relatively small trade volumes can move prices dramatically, the risks for investors become much higher. In addition to the threat of slippage, there’s an increased opportunity for bad actors to manipulate prices using tactics like:

• Spoofing: Spoofers place large volumes of fake buy or sell orders to create a false impression of demand or supply, then capitalize on the resulting price movements.
• Pump and dump: This involves driving up the price of an asset by spreading false rumors, then selling off holdings of the asset at the artificially inflated price.
• Wash trading: This is a process in which a trader buys and sells the same asset simultaneously to inflate the trading volume. Typically, the goal is to draw attention to an asset or exchange so the manipulator can take advantage.

Unfortunately, the global and continuous nature of 24-hour markets also makes oversight more challenging for regulators. Trades often cross multiple jurisdictions, each with its own rules and enforcement capabilities. Monitoring activities becomes difficult enough, let alone coordinating timely responses to underhanded tactics.

Regulatory Bodies Governing 24-Hour Trading

Regulating 24-hour markets can be complex, but there are still authorities working to protect investors. In the U.S., the Securities and Exchange Commission (SEC) is the primary agency responsible for overseeing securities markets, including those with continuous trading. It establishes and enforces rules designed to promote market transparency, prevent fraud, and discourage unfair practices.

The Financial Industry Regulatory Authority (FINRA)—formerly, the National Association of Securities Dealers (NASD)—also plays a central role in regulating these markets. In addition to licensing broker-dealers, it conducts real-time surveillance of trading activity and reports suspicious behavior to the SEC and law enforcement.

Regulations and Compliance Requirements for 24-Hour Trading

While there isn’t a set of rules dedicated specifically to 24-hour trading, traditional market regulations still apply during overnight and extended hours. Some of the most important under continuous conditions revolve around transparency, order execution, and investor protection, including:

• Regulation NMS: This is a set of SEC rules designed to promote transparency and fair pricing, including the Order Protection Rule, Access Rule, Sub-Penny Rule, and Market Data Rules. It improves investor access to market data across exchanges and helps investors get the best prices for their orders.
• FINRA Rule 5310: The Best Execution and Interpositioning is another regulation designed to help investors get the best price for their orders. It requires brokers to seek the best available market for a security and to execute trades so that customers get the most favorable quote possible under current conditions.
• SEC Rule 10b-5: This rule aims to prevent all forms of securities fraud. It prohibits anyone from lying, omitting information, defrauding, or otherwise deceiving another person in connection with the purchase or sale of a security.
• FINRA Rule 3110: The Supervision rule requires brokers to establish and maintain a system designed to supervise the activities of all associated persons and achieve compliance with applicable securities regulations. This system must include written supervisory procedures.
• SEC Rules 17a-3 and 17a-4: These are record-keeping rules that require brokers to create and maintain detailed records of all their trades and related communications. This ensures regulators can inspect their activities during an audit or investigation.

In addition to complying with all the rules that apply during normal trading hours, like those above, brokers that offer extended trading sessions must follow FINRA Rule 2265 (Extended Hours Trading Risk Disclosure). It requires them to provide investors with a prominent written disclosure about six specific risks involved in after-hours trading, which include the risk of:

• Lower liquidity
• Higher volatility
• Changing prices
• Unlinked markets
• News announcements
• Wider spreads

Future Trends in 24-Hour Trading Regulations

With 24-hour markets becoming more common, authorities are growing increasingly aware of the unique challenges they present. As a result, trading regulations have already begun to evolve.

FINRA Rule 2265 is a prime example, requiring firms that offer extended hours trading to provide a clear disclosure about the risks. Future laws may include even more robust or dynamic disclosure requirements, such as those tailored to specific asset classes.

Regulators may also look to strengthen rules around supervision. As after-hours trading gets more prevalent, it becomes increasingly important for brokers and exchanges to maintain adequate monitoring of activity across all hours of operation. Similarly, authorities may increase penalties for market manipulation to further discourage abusive behavior.

Since many 24-hour trades span multiple jurisdictions, it’s also reasonable to expect more collaboration between international regulators. Agencies like IOSCO and FSB may try to facilitate the development of industry-wide standards for transparency and investor protection.

The Bottom Line

Twenty-four-hour markets are becoming increasingly popular across asset classes since they invite global participation and grant investors more flexibility. However, they also create periods of low liquidity in which several risks—like changing prices, slippage, and market manipulation—are magnified.

Fortunately, while the global and continuous nature of 24-hour markets can also make enforcement challenging, existing SEC and FINRA regulations still apply. Going forward, you can also expect authorities to strengthen their collaboration and refine their surveillance systems to better protect investors.