We need to stop pretending that performative actions equate to good policy. No, extending trading hours won’t increase trading volumes on the EGX — even if it will make us feel like we’re “doing something” and gives us the chance to pat ourselves on the back.

How can we say that with such strong conviction? Two things: empirical research and common sense.

Research consistently shows that volume isn’t a “liquid” that expands to fill a larger container; it’s more like a “crowd” that needs a specific time and place to gather. When you increase hours, you don’t necessarily create new trades — you just “thin out” the existing ones.

Case in point: When the London Stock Exchange extended the trading hours of its International Order Book (LSE IOB) by one hour in September 2018, average trading volume went down compared to the FTSE100, volatility went up, and the bid-ask spread widened.

Other research fromJapan andHong Kong shows that extending hours rarely creates a new “pool” of investors. Instead, it leads to the trading volume being cannibalized. Market quality also drops and, similar to the findings of the LSE experiment, bid-ask spreads widened and the cost of trading went up.

…and what do you think happens to price discovery? It also suffers, of course. When hours are stretched thin, the market becomes noisier and more susceptible to price swings based on relatively small trades.

Efficient prices reflect the consensus of a diverse group of buyers and sellers. This “consensus” isn’t buoyed by extending trading hours. A wider trading window means that trades that would have been recorded during regular hours are simply moved to the extended period. The total volume can even dip slightly because of the lack of a critical mass of traders.

Heck, this even shows that reducing trading hours could be the way to go. Shortening trading hours has been shown to narrow spreads by forcing all participants to interact within the same narrow window.

Our favorite finance columnist, Matt Levine, who writes Money Stuff for Bloomberg, goes to the extreme: He only half-jokingly proposed a 15- to 30-minute trading day, suggesting that hyper-concentrating all buyers and sellers into a single intense window would create the most efficient price discovery and highest liquidity density possible.

But, come on Enterprise, why are you so bothered by this? To be honest, this isn’t a big deal — we admit it. And it’s not even a major policy change. It bugs us only because actions like these mask the real issues that are hindering the growth potential of the Egyptian stock market.

Extending trading hours won’t help the EGX, and neither is trying to get more individuals “coded” and day-trading on apps while we’re at it.

Only three things will improve the quality and volumes on the EGX:

  1. Continuing to ensure that international investors can enter the market and exit their positions without stringent capital controls — which is already happening;
  2. Higher-quality paper with meaningful stakes in free-float — we need more Banque du Caire’s on the EGX, and we need them to list stakes substantially larger than the 10-20% that seem popular right now;
  3. Government pensions, insurance, and other slush funds must become active participants in the market.

Corporate pension funds becoming a “thing” (think RRSPs in Canada or 401ks in the US) would help, too. But really: Make sure foreign institutions can get in and out. Get more, higher-quality names into the market with bigger free floats. And force state institutions to start investing in equities. That’s it.

__________

Contrarian View is an occasional column of EnterpriseAM wherein we (or a member of our community) stake out a claim. Disagree? Drop us a note. Have something you want to get off your chest? Drop us a line at egypt@enterpriseam.com.

Tags: