Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Does the market close at 4:00:00 pm or at 4:00:01 pm?

A few years ago, somebody asking this question would have been dismissed as a nit picking nerd, but today that question has become extremely important. Last week, the Wall Street Journal’s MoneyBeat blog carried an interesting story about how this difference cost a trader $100,000.

The official market close in the US is 4:00:00 pm, but the computers at Nasdaq keep humming for almost one second longer to reconcile all trades and determine the market closing price. About 150 milliseconds after 4:00 pm on December 5, the earnings announcement of Ulta Salon Cosmetics & Fragrance Inc. hit Business Wire and within 50 milliseconds after that a series of sale orders started hitting the market. When the market closed 700 milliseconds after 4:00 pm, the stock had fallen from $122 to $118.

The problem is that companies that want to release earnings after trading hours assume that trading stops at 4:00:00 pm, while smart traders know that the actual close is nearer to 4:00:01. That creates a profit opportunity for the fastest machine readable news feeds and the fastest trading algorithms. Traders are thinking in terms of milliseconds, but regulators are probably thinking in terms of minutes. Time for the regulators to catch up!

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