How Does Robinhood's 24-Hour Trading Work: In-Depth Guide for Retail Investors

6-10 minute read

Author: Tucker Massad

Published September 25, 2024

In May 2023, Robinhood revolutionized retail trading by introducing 24-hour stock trading on its platform. Robinhood has taken a bold step by introducing 24-hour trading, allowing retail investors to trade stocks and ETFs around the clock from Sunday evening through Friday night. However, this raises several important questions about how such a system works, the impact on regular trading hours, and how these systems operate from a business perspective.

Let’s dive deeper into Robinhood’s 24-hour trading and address the most frequently asked questions.

#How Does Robinhood Execute 24-Hour Trades?

Robinhood's 24-hour trading system operates differently from traditional market hours trading. To facilitate round-the-clock trading, Robinhood partners with Blue Ocean Technologies, an Alternative Trading System (ATS). This partnership allows Robinhood to offer extended trading hours beyond what's available on public exchanges. Let's delve into the details of how this system works:

Robinhood's Interaction with Blue Ocean ATS

1. Order Routing

   When a Robinhood user places an order during extended hours (outside of 4:00AM to 8:00PM ET), Robinhood routes this order to Blue Ocean ATS instead of sending it to a public exchange like NYSE or NASDAQ.

2. Order Matching

   Blue Ocean ATS acts as a matching engine, pairing buy and sell orders from various participants, including other retail investors and potentially institutional investors who have access to the ATS.

3. Execution and Confirmation

   Once a match is found, Blue Ocean ATS executes the trade and sends confirmation back to Robinhood, which then updates the user's account to reflect the completed transaction.

4. Liquidity Provision

   To ensure sufficient liquidity during off-hours, Blue Ocean ATS may work with market makers or other liquidity providers who agree to buy or sell securities at quoted prices, even when there might not be a matching order from another trader.

Differences Between 24-Hour and Regular Market Hours Trades

1. Liquidity

   Regular market hours typically offer higher liquidity due to the participation of a broader range of market participants. In contrast, 24-hour trading through Blue Ocean ATS may have lower liquidity, potentially leading to wider bid-ask spreads and more volatile price movements.

2. Price Discovery

   During regular market hours, the high volume of trades on public exchanges leads to efficient price discovery. In 24-hour trading, price discovery may be less efficient due to lower trading volumes and fewer participants, potentially resulting in prices that don't fully reflect all available market information.

3. Execution Speed

   Regular market hours trades are often executed almost instantaneously due to high liquidity and advanced infrastructure of public exchanges. 24-hour trades through Blue Ocean ATS might experience slightly longer execution times, especially during periods of low activity.

4. Order Types

   While Robinhood offers various order types during regular market hours, the types of orders available during 24-hour trading might be more limited. For instance, complex order types (ex. fractional share orders) or certain conditional orders aren't available during 24-hour trading.

5. Regulatory Oversight

   Trades executed on public exchanges during regular hours are subject to stringent regulatory oversight. While Blue Ocean ATS is still regulated, the oversight framework for ATS platforms can differ from that of public exchanges, potentially affecting things like trade reporting and market surveillance.

While 24-hour trading offers increased flexibility, it comes with its own set of considerations and potential risks. The lower liquidity and potentially wider spreads during off-hours can impact trade execution and pricing. Oftentimes news and events that occur outside of regular market hours can lead to significant price movements in a less liquid environment, which increases volatility and risk fairly drastically.

#How Does 24-Hour Trading Affect the Next Regular Trading Day?

One of the key questions is how 24-hour trading impacts the regular trading day when the U.S. markets open at 9:30 a.m. ET. Here’s how overnight activity can influence the market:

1. Price Movements and Gap Openings

   Trading outside regular hours typically occurs with lower volume and liquidity, leading to more volatile price movements. These overnight price shifts can directly impact regular trading hours in several ways:

   • Gap Openings: Significant overnight price changes often result in stocks opening at a different price than their previous day's close, creating price "gaps" on charts.
   • Initial Volatility: The first few minutes of regular trading can be highly volatile as the market reacts to and potentially corrects overnight price movements.
   • Trend Setting: Strong overnight trends may continue into regular hours, influencing the day's overall direction.
   • Arbitrage Opportunities: Discrepancies between overnight and opening prices can create short-lived arbitrage opportunities for quick traders.

2. Pre-Market Sentiment

   Since 24-hour trading captures investor sentiment in real-time, it can give a glimpse of how a stock might perform when the broader market opens. Analysts and investors often look at after-hours and pre-market trading as indicators of how stocks might react when the regular trading session begins. For example, earnings releases or significant news that occurs after 4 p.m. ET will likely cause immediate reactions in overnight trading, potentially setting the tone for the next day.

3. Volume Carryover

   Lower liquidity in overnight trading means fewer participants, which can cause exaggerated price movements. However, once regular market hours begin, the influx of new traders tends to normalize these prices. But this doesn’t always happen immediately, especially if the overnight activity was influenced by significant news. As such, the momentum from 24-hour trading can carry into the regular trading day, either amplifying or mitigating trends.

#How Do ATS Systems Like Blue Ocean Make Money?

Alternative Trading Systems (ATS) like Blue Ocean ATS play a crucial role in facilitating after-hours and overnight trades. Unlike traditional exchanges, ATS platforms are private entities that match buyers and sellers outside the public exchanges. But how do they generate revenue?

1. Transaction Fees

   Blue Ocean ATS earns money primarily through transaction fees. Every trade executed on the platform incurs a fee, which is either paid by the broker (in this case, Robinhood) or passed along to the user. While these fees are typically small, they add up with high trading volume​. Given that Robinhood’s 24/5 trading aims to increase participation in after-hours trading, ATS platforms like Blue Ocean can generate significant revenue as more trades are processed during overnight sessions.

2. Data Sales

   Another revenue source for ATS platforms is selling trade data. Market participants—especially institutional investors—value trade data because it helps them understand market trends and liquidity outside regular hours. By selling anonymized data about trades executed during these periods, ATS platforms can earn additional income​.

3. Order Flow Arrangements

   In some cases, ATS platforms also generate revenue by directing order flow to market makers or other liquidity providers. This means they sell the right to execute trades to third parties, which then earn a small profit from the bid-ask spread on each trade. This is similar to how public exchanges operate, but with fewer regulatory constraints​.

#What Is the Difference Between Trading in an ATS vs. a Public Exchange?

One of the most frequent questions retail traders have is how trading on an ATS differs from trading on a public exchange like the NYSE or NASDAQ.

1. Liquidity

   Public exchanges benefit from higher liquidity during regular trading hours, meaning there are more buyers and sellers in the market, making it easier to execute large trades without significantly affecting the stock’s price. In contrast, ATS platforms like Blue Ocean typically have lower liquidity, especially during overnight hours, which can result in wider bid-ask spreads and higher price volatility.

2. Price Discovery

   During regular market hours, the price discovery process—the mechanism by which market prices are set—is more efficient because of the high volume of trades and the number of participants. In contrast, overnight trading in ATS platforms may lead to less accurate price discovery because fewer trades are occurring, which means the prices you see might not always reflect the broader market consensus​.

3. Trading Costs

   ATS platforms have different fee structures compared to public exchanges. While Robinhood offers commission-free trading, the underlying ATS systems often impose fees on brokers, which could indirectly affect the retail trader. Additionally, bid-ask spreads tend to be wider during overnight sessions, meaning that investors might pay slightly more for stocks than they would during regular hours​.

#Why Don't Other Brokers Offer 24-Hour Trading?

Currently, Robinhood is the only major U.S. brokerage to offer 24/5 trading, thanks to its partnership with Blue Ocean ATS. But why haven’t other brokers like Charles Schwab, Fidelity, or TD Ameritrade followed suit?

1. Technical Complexity

   Offering 24-hour trading requires significant technological infrastructure. Robinhood’s rollout of 24/5 trading faced hurdles, including outages and capacity issues at Blue Ocean ATS. Other brokers may hesitate to offer 24-hour trading until they are certain that the technology can support such continuous activity.

2. Regulatory Challenges

   ATS platforms operate under different regulatory frameworks than public exchanges. Implementing 24/5 trading means complying with different sets of rules for trades executed outside regular hours, which could involve additional regulatory hurdles. This complexity might dissuade other brokers from adopting 24-hour trading.

3. Market Demand

   Another factor is the question of demand. Not all retail investors want to trade 24 hours a day, and some brokers may not see sufficient demand to justify the cost of expanding their trading hours. For instance, many investors are content to trade during regular or extended hours when there’s greater liquidity and less volatility​.

#Uncertainties Surrounding Robinhood’s 24-Hour Market and the Blue Ocean

Despite the innovation and promise behind Robinhood’s 24-hour trading, recent events have led to skepticism among some traders. A particular incident on Tuesday, August 6, 2024, raised concerns about the reliability and transparency of the 24/5 trading system. On this day, Robinhood abruptly shut down its 24-hour trading service for the night without providing a clear explanation, leaving many traders in the dark about what happened. The incident sparked frustration and speculation among retail traders, especially since neither Robinhood nor Blue Ocean ATS, the alternative trading system that facilitates overnight trades, offered a detailed explanation.

Image: Alert Message From Robinhood App When 24-Hour Trading Was Suspended

According to reports, the outage occurred during a time of increased volatility in the markets, fueling rumors that the shutdown might have been triggered by efforts to manage risk or quell market instability. However, Blue Ocean ATS CEO Bryan Hyndman quickly denied such claims, asserting that the outage had nothing to do with suppressing volatile market activity. He further emphasized that the issue was unrelated to any market events, dismissing speculation that Blue Ocean or Robinhood acted to prevent further price swings​.

While Hyndman’s statements downplayed the severity of the situation, the lack of a specific technical explanation has left investors uneasy. Retail traders, who rely on access to real-time information and uninterrupted trading, were left without an answer to a crucial question: Why was 24-hour trading halted? The vagueness surrounding the outage created a cloud of uncertainty, especially given the novelty of Robinhood’s 24-hour trading service and the reliance on third-party systems like Blue Ocean ATS to facilitate trades​.

#Hesitation to Fully Trust 24-Hour Trading

This incident underscores one of the key risks of relying on relatively new and untested systems for after-hours trading. While Robinhood and Blue Ocean have touted the advantages of 24/5 trading, including greater flexibility and the ability to react to global market events, the August 6th outage highlights a critical unknown: Can these systems consistently handle the demands of round-the-clock trading?

1. Technical Vulnerabilities

   ATS platforms like Blue Ocean are less visible and less transparent than major exchanges like the NYSE or NASDAQ. While these alternative platforms play an essential role in offering after-hours liquidity, they may also be more prone to technical failures. The August 6th shutdown demonstrated that these platforms could experience unanticipated issues, with little transparency provided to users about the root causes​.

2. Trust in System Capacity

   Retail traders have a legitimate concern about whether Robinhood’s technology stack, including its partnership with Blue Ocean ATS, can handle the scale of 24-hour trading. The outage raised fears that the system might not be robust enough to accommodate higher-than-expected trading volumes during periods of intense volatility. Without detailed explanations from Robinhood or Blue Ocean, traders are left to wonder if future outages might occur during critical market events.

3. Regulatory and Operational Uncertainty

   Blue Ocean ATS operates under a different regulatory framework than public exchanges, which adds another layer of uncertainty. While public exchanges are subject to rigorous regulatory oversight and reporting requirements, ATS platforms often have more leeway. This regulatory difference can leave investors feeling uneasy, as they may not have the same protections or information available when trading on an ATS platform during after-hours sessions.

#A Cautious Approach to 24-Hour Trading

For retail traders, the August 6th outage serves as a reminder that while 24-hour trading offers exciting possibilities, it also comes with inherent risks. The lack of transparency from both Robinhood and Blue Ocean ATS in explaining the outage has left investors questioning the reliability of the system. For now, traders should approach 24-hour trading cautiously, recognizing that while the ability to trade around the clock is appealing, it may come with the cost of increased uncertainty and occasional disruptions.

Ultimately, the success of Robinhood’s 24-hour trading will depend on its ability to provide reliable service without major outages. As more retail investors look to take advantage of after-hours trading, system reliability and transparency will be critical to maintaining trust in the platform.