London Stock Exchange. Image source: Ministry of Housing, Communities and Local Govt, clickr.com
Trading nowadays is mostly performed over the internet, since OTC trading allows various market participants to be active on the markets without necessarily being directly involved with any particular exchange. Nevertheless, it has to be acknowledged that the most significant trading volumes are still transacted in exchange-based trading environments. For that reason, an awareness of the working hours of the biggest and most important global exchanges can shed light on how the market behaves at different times during the day.
At times when very few, or even none, of the exchanges are being active, the overall trading volume that is being transacted can be expected to be nominal, limited to the activity in the OTC markets alone. At such times, the general level of liquidity would be significantly diminished as well, thus impeding the process of getting in and out of the market easily. Finally, the low levels of liquidity tend to polarise the active market forces, which makes the market susceptible to sudden changes in the overall demand. Because of these characteristics of the non-trading hours of the market, occasionally random events such as flash crashes become possible. That is so because the overall trading volume necessary to balance out any sudden distortions in the underlying demand tends to be deficient at such times.
The opening hours of the various exchanges all over the world tend to overlap with each other for a limited time during the day, leading to increased trading volumes and peak market activity during this period. However, they also leave specific gaps that create the conditions listed above.
The Global Map of Trading Activity.
Each of the four trading sessions highlighted above underpins the opening hours of the exchanges that are contingent on the specific geographic region. That is why, for example, the opening hours of the Shanghai and the Tokyo Exchanges comprise the Asian trading session, in addition to the Australian Stock Exchange and others.
The period between 22:00 UTC and 01:00 UTC is especially interesting because there are no major Exchanges that are operating during these three hours. Consequently, the price action throughout that period can be expected to be quite subdued and unremarkable, given the characteristic nominal trading volume. It makes the execution of trading orders at the time unappealing and risky because of the reasons listed above.
The time frame between 14.30 UTC and 16:30 UTC is usually when trading activity reaches a climax during the day because that is when the European, UK, and U.S. trading sessions overlap. Arguably, this is when it makes the most sense to be active on the market because the biggest directional swings of the most popular assets tend to happen within that period of time. This is especially true for intraday traders looking to execute their orders as soon as possible.
Within those two hours, markets are prone to be least erratic, which allows for more precise trade execution. Price action tends to be more concise during this window because the general market noise gets negated when trading activity peaks.
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