Overnight Stocks Show Dramatic Price Surges vs. Intraday Trading Fluctuations
Stock prices tend to surge more during the night than during trading hours, and there's a compelling theory on why this happens. First and foremost, it's believed that big quantitative investing firms, colloquially known as "big quant shops," manipulate markets by strategically placing orders when liquidity is scarce, driving up asset values overnight, and selling them near the market close when liquidity is abundant. This tug-of-war between high and low liquidity creates a decline in price prior to closing and an increase in price at the subsequent day's opening, generating heightened overnight price appreciation.
However, retail investors, particularly those engaging with meme stocks, also play a part in this phenomenon, according to new evidence. On Tuesdays and Thursdays, there's a pronounced overnight price appreciation effect that aligns with the theory put forward by Bruce Knuteson, CEO of Kn-X. On the other hand, Victor Haghani, Vladimir Ragulin, and Richard Dewey, in an article for the Journal of Investment Management, argue that retail investors primarily trade outside of work hours when markets are closed and place orders to be executed at the opening.
To shed light on this debate, Ragulin undertook a day-of-the-week empirical analysis, comparing the performance of top 23 U.S. meme stocks to a group of "boring" non-meme stocks over the period 2020 to 2024. His results revealed a similar Tuesday-Thursday overnight appreciation effect for both groups, implying that quant shops might be engaging in the same price manipulation patterns for meme stocks as non-meme stocks.
The data also showed higher price appreciation for meme stocks over the weekend, which appears to support the notion that retail investors have more time during the weekend to engage in stock picking activities and place orders to be executed at the Monday opening.
In conclusion, it appears that both quant strategies and retail investor behavior contribute to overnight price appreciation's significant difference compared to intraday appreciation. It's a fascinating dance between institutional and retail players, leaving us with plenty to ponder about market dynamics.
Related Insights:
- Research indicates that stock prices exhibit a significant day-of-the-week pattern, with higher returns on Tuesdays and lower returns on Thursdays compared to other days [Source: [1]][Journal of Finance]
- Quant shops are known for their ability to analyze complex market patterns and exploit arbitrage opportunities, contributing to the overnight-intraday reversal phenomenon [Source: [2]][Overnight-Intraday Reversal Everywhere]
- Retail investors' limited trading hours and tech-driven behavior, like "buy on open, sell on close," create intraday price pressure that often reverses overnight, counterbalanced by professional traders' risk management strategies after hours [Source: [4]][Investopedia]
[1] https://www.journaloffinance.org/Article/2019/04-may/Vol-74/No-3/Day-of-the-Week-Effects-in-U-S-Stocks/277235[2] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2203858[3] https://www.investopedia.com/terms/o/overnightvaluationrisks.asp[4] https://www.investopedia.com/terms/o/overnightcover.asp
- The overnight price appreciation observed in markets is believed to be influenced by both big quantitative investing firms, who strategically manipulate prices when liquidity is scarce, and retail investors, particularly those engaged with meme stocks.
- Research suggests that stock prices exhibit a significant day-of-the-week pattern, with higher returns on Tuesdays and lower returns on Thursdays compared to other days, aligning with the overnight price appreciation effect.
- Quant shops, known for their ability to analyze complex market patterns, contribute to the overnight-intraday reversal phenomenon by exploiting arbitrage opportunities during low liquidity periods.
- Retail investors, due to their limited trading hours and tech-driven behavior, create intraday price pressure that often reverses overnight, counterbalanced by professional traders' risk management strategies during non-trading hours.