One of the benefits often discussed with regards to tokenised securities, is that by putting them on the blockchain they will be able to be traded at any time of the day. This is in contrast to most traditional financial markets, like the London Stock Exchange, where trading in equities is only permitted between certain times – typically during working hours on weekdays. Some financial assets however, like currencies and commodities, can be traded pretty much round the clock given their high global demand.
But do equity investors want the same flexibility and freedom to buy financial assets as have with online shopping?
Using the example of a tokenised security representing share in a company, let’s look at some of the benefits and drawbacks of 24 hour trading.
– React faster to news. If a company has a piece of news which comes about outside of trading hours, a factory burning down for example or the government agreeing a new piece of legislation, investors have to wait until the markets are next open to be able to trade. At this point the news will have been widely disseminated and opportunities for making a profit/minimising losses will have been diminished. Should an investor be able to trade their digital security as soon as the news is released however, they may be able to get a better price for their holdings than if everyone already knows about it.
– Convenience. Not everyone is able to trade shares when the markets are open. After all, many people are at work during the LSE’s opening hours. Therefore, there should be a huge market for individuals who want to trade in the “off-peak” hours, possibly in the evening or at weekends when they have the time to analyse investment opportunities with a clearer head.
– Value opportunities. While the supply of available stocks might be much lower outside of normal trading hours (see more below) the demand for those stocks will be lower too given that fewer people will be looking to trade. This means that there may be opportunities to quickly snap up shares which investors want to get rid of quickly and have thus marked down to a low price.
– Lack of sobriety. Making an investment should be a thought out process involving research, analysis and scrutiny. No financial asset should ever be bought or sold on a whim unless you have a lackadaisical attitude to money. If assets are able to be bought at any time of the day or night then this increases the opportunity for let’s say, “less well researched” investment decisions to be executed – for example trading on a share tip received from a drunk stockbroker after getting home at midnight on a Friday evening.
– Lower liquidity. On the opposite side of the value opportunities point above are the sellers of the investment. As demand for stocks will be lower outside of normal trading hours you might have to substantially drop the offer price of your shares in order to attract a buyer. As a result you might receive a lot less for your investment than if you traded at peak times. On a related matter, low trading volumes might result in a wide spread between bid and ask prices, again seeing lower prices achieved.
Overall, there are expected to be many positive things to come from the 24 hour trading of digital securities. But with the potential disadvantages that come with it, investors should be prepared to do their research on when exactly is the best time to trade.
Find out more about tokenised securities here