I used to work at the trading desk. It was the 1990s, in the midst of an amazing tech boom. I have two funding lines, a day trading limit, and funds that I can hold overnight (or longer). The overnight P&L always outperformed the intraday, which is why the company tolerated me with the funds. However, the negatively correlated results for more activities do not match what the props desk has historically believed. Great performance dropped me down the behavioral finance rabbit hole. It also explains my preference for indexed and mostly passive portfolios.

The issue of intraday and overnight gains has recently resurfaced. Bruce Knutsonformer DE Shaw quantum and former particle physicist/MIT professor, surface theory Quant hedge funds manipulate prices in the thinly traded after-hours market to make their funds appear better than they actually are.

maybe – but maybe not. a detailed FT column Author Robin Wigglesworth explains the counter argument well; Michael and Ben discuss it happily animal spirits this week. I’ll add a little color to the discussion.

Wigsworth (MiB is here) narrates persuasive research debunking its conspiratorial nature: I find two of the explanations convincing: 1) As long as the market is open (+weekends+holidays), the market closes four times, so naturally in ample The larger subset in time should have many times the return of the smaller (market time) subset. Also note that earnings reports and other market-moving news are released before or after the market opens, so adjustments are made at the close. This is not surprising given the art of earnings management and the high percentage of quarterly results.

But there is another factor that may be overlooked in this debate: Market time is what professionals have to do. Positions are squared, cash is moved, syndicates are executed, trading errors are fixed, portfolios are rebalanced, secondary markets, IPOs, SPACs are floated, bond offerings are sold. All of this happens during market hours. Institutions are both buyers and sellers during the day. They are knowledgeable, have vast capital, insightful streams of information, and specialize in trading stocks, bonds, options, and more.

Most of what happens between 9:30am and 4:00pm has to do with the “stock business” and not necessarily the investment business. Day trading is when all the “block and deal” happens – valuations or long-term performance have nothing to do with these executions.

You and I buy stocks during the day because a) that’s when the market is open and 2) we expect prices to rise in years and decades; we don’t buy because we expect higher prints before 4pm .

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There are other issues here: I’m usually skeptical of conspiracy theories because people are so bad at keeping secrets. LIBOR Manipulated, we found out; Enron’s book was cooked, we found out; mutual fund trading scams were quickly found. Look how much happened on January 6th – information kept pouring in and silence from those with a knack and motivation. Ryan Holiday (MiB is here) explained in his book conspiracy How can only 2 keep a secret for something as trivial as funding Hulk Hogan vs. Gawker Media’s lawsuit.

I never want to ignore the possibility of fraud or manipulation, which happens all the time on Wall Street. Yet decades of after-hours outperformance thanks to coordinated after-hours trading? This blatantly illegal activity takes a long time to be detected. Until we see some solid evidence, I have to dismiss it as a weak theory that contradicts a better explanation.

Before:
Understanding the appeal of conspiracy theories (October 8, 2020)

Deep Stupidity, Conspiracy Theories and Investors (13 April 2018)

NFP, inflation and conspiracy theories (December 10, 2014)

MiB: Robin Wigglesworth on the rise of indexes (November 13, 2021)

MIB: Ryan Holiday’s sex tape cheated (March 10, 2018)