Trading hours
Outside core trading hours, spreads are wider and pricing is worse. Crypto markets run around the clock, which brings its own set of problems.
Stocks and ETFs trade on exchanges at fixed times. During that core session, activity is highest, spreads are tightest, and prices are most reliable.
Outside those hours, trading often still happens, just with fewer participants. Spreads are then wider, and you pay more for the same order. Especially unfavorable is the first quarter-hour after the open, when prices are still unsettled.
If your ETF holds assets from another time zone, add to that the fact that the home market might be closed. Prices then get estimated, which increases the deviation.
With crypto, there are no trading hours at all. That sounds convenient, and it has a downside: there's no pause where the market settles down, and the sharpest moves often happen at night, when little is going on and few buyers are around.
Liquidity is distributed unevenly across the trading day. A U-shaped pattern is typical, with elevated volume at the open and close. Volatility is highest at the open, as overnight information gets processed. Spreads are wider during that phase, which makes execution systematically more expensive.
For funds with underlying assets in other time zones, a valuation problem arises when the home market is closed. Market makers then derive fair value from correlated, currently tradable instruments. The resulting pricing carries greater uncertainty, which shows up as wider spreads and larger deviations from intrinsic value.
Markets that trade continuously lack the opening auction mechanism that pools liquidity on exchanges and rediscovers prices after a news pause. Without that mechanism, adjustment to new information during thin periods happens through continuous trading, which favors sharp jumps and makes clustered liquidations more likely.
Summary
- Spreads are tightest during the core trading session.
- The first quarter-hour after the open is especially expensive.
- Crypto's lack of a trading pause means sharp moves during thin overnight hours.
Did you get it?
Why is the opening phase unfavorable for an order?
Because volatility and spreads are highest there, as overnight information gets processed.
What happens when the home market of the underlying assets is closed?
Fair value gets derived from correlated instruments, which widens spreads and deviations.
What's the downside of continuous trading?
There's no opening auction to pool liquidity. Adjustments happen in thin periods and become jumpy.