Comment Text:
The CFTC’s request for input on 24/7 derivatives trading and clearing provides a useful opportunity to reexamine the market model. Continuous trading could potentially offer significant benefits such as improved market access and more precise price discovery. However, extending trading beyond traditional hours undoubtedly brings new challenges. These include increased liquidity risk during off-peak periods, the need for enhanced margining and collateral practices, and potential vulnerabilities in system resilience and cybersecurity.
For 24/7 trading to work effectively, risk management frameworks must be strengthened and regulatory oversight updated. This means adopting robust real-time surveillance, ensuring dependable disaster recovery processes, and refining operational protocols. A careful, phased approach—with rigorous testing and clear regulatory guidance—is critical to protecting market integrity and safeguarding customer interests as the industry transitions to continuous operations.
Market and Liquidity Risks
Under a 24/7 trading framework, market and liquidity risks become even more significant during off-peak hours. Lower trading volumes on weekends and holidays can lead to increased volatility, causing rapid and severe price swings. In these low activity periods, thin liquidity may allow some participants to exploit vulnerabilities-whether intentionally through manipulative practices or inadvertently by destabilizing price discovery mechanisms.
Moreover, the risk of flash crashes—sudden, extreme price drops occurring in seconds due to abrupt liquidity evaporation—further underscores the need for robust liquidity management and swift risk intervention protocols. To manage these risks, it is critical for derivatives clearing organizations and futures commission merchants to bolster their risk controls by enhancing real-time monitoring, reexamining margin requirements, and incorporating additional collateral measures. These steps are key to mitigating defaults and preventing cascading market disruptions when liquidity is low.
Disadvantage for Smaller Market Participants
A continuously open trading environment may place smaller market participants at a significant disadvantage. Firms without the advanced technological resources or capital to monitor market activity around the clock might struggle to respond promptly to rapid price swings or liquidity shifts. This competitive imbalance could result in lower levels of participation by these smaller entities, leaving them more exposed to risks and less able to capture opportunities in volatile conditions.
Additionally, the 24/7 model may enable larger players, who are able to invest in advanced real-time data analytics and round-the-clock risk management systems, to potentially capitalize on information asymmetries. While concrete empirical evidence is still emerging, it is plausible that this could contribute to instances of market manipulation or predatory trading practices, thereby further marginalizing smaller participants.
It is critical for industry stakeholders and regulatory bodies to consider measures that address these disparities, ensuring that the continuous trading model does not inadvertently undermine fair market access and operational parity.
Witching-Specific Risks
Key expiration events—such as double, triple, and in some discussions, quadruple witching— pose additional challenges in a continuous trading environment. During double witching, when two types of contracts (for example, stock and index options) expire simultaneously, even minor shifts in sentiment can induce significant market movements. Triple witching, involving the simultaneous expiration of stock options, index options, and index futures, is traditionally associated with heightened activity and volatility.
When these events coincide with off-peak trading hours, the resulting volatility and liquidity stress can be even more severe. Risk management protocols should be specifically tailored to handle these expiration periods by ensuring that margin requirements, collateral strategies, and market monitoring tools effectively mitigate the heightened risks.
Operational and Technological Considerations
Continuous trading demands a significant shift in how systems are built and maintained. Without the benefit of traditional scheduled maintenance windows, trading platforms may need to rely on high-availability architectures that support live deployments, rapid rollbacks, and the quick replacement of critical components. Although modern systems can often accommodate continuous operations through rolling or 'hot' updates, additional safeguards may be warranted in a 24/7 environment. The technology must support real-time monitoring and prompt problem resolution to ensure that minor issues do not escalate, especially during periods when technical and compliance staffs may be limited. Given the theoretical potential for flash crashes, platform operators should consider implementing dynamic circuit breakers and enhanced real-time detection systems that may halt trading during abnormal conditions, even during off-peak hours.
Furthermore, while increased cybersecurity risks are anticipated in a continuously online model, empirical studies and simulation-based stress tests could help to more accurately quantify these risks and determine the effectiveness of proposed countermeasures. Additionally, the need to maintain high availability, continuous system integrity, and robust cybersecurity around the clock could impose substantial operational and financial burdens, likely necessitating significant investments in technology upgrades and increased staffing levels.
Regulatory and Surveillance Considerations
Without the benefit of traditional scheduled maintenance windows, trading platforms may need to rely on high-availability architectures that support live deployments, rapid rollbacks, and the quick replacement of critical components. Although modern systems can often accommodate continuous operations through rolling or 'hot' updates, additional safeguards may be warranted in a 24/7 environment. The technology must support real-time monitoring and prompt problem resolution to ensure that minor issues do not escalate, especially during periods when technical and compliance staffs may be limited. Given the theoretical potential for flash crashes, platform operators should consider implementing dynamic circuit breakers and enhanced real-time detection systems that may halt trading during abnormal conditions, even during off-peak hours.
Furthermore, while increased cybersecurity risks are anticipated in a continuously online model, empirical studies and simulation-based stress tests could help to more accurately quantify these risks and determine the effectiveness of proposed countermeasures. This may lead to regulatory arbitrage or uneven application of rules across borders. Maintaining market integrity under these conditions requires enhanced real-time surveillance tools that function around the clock, as well as updated regulatory guidelines that reflect the realities of continuous trading. Additionally, risk disclosure practices need to be revisited to clearly communicate the heightened risks of trading outside traditional hours, and automated measures such as auto-liquidation must be carefully evaluated to ensure they do not inadvertently destabilize the market.
Clearing and Counterparty Risk Management
In a continuous trading environment, derivatives clearing organizations and futures commission merchants face new operational challenges. With no traditional closing hours, managing margin calls, collateral adjustments, and counterparty risk assessments may need to occur in real time—even during periods of low liquidity. Although this assessment is largely based on theoretical projections, it underscores the potential need to update risk management practices, reexamine margin requirements, and enhance collateral strategies to ensure adequate buffers in the event of sudden market shifts. Pilot programs or simulation studies could provide valuable insight into these dynamics.
It is critical that these institutions develop and test robust contingency plans for extended market stress outside of normal business hours. In addition, the round-the-clock schedule complicates coordination among market participants, service providers, and third-party vendors, requiring solid after-hours monitoring and emergency protocols, advanced technology solutions, and effective staffing and escalation procedures to protect overall market integrity.
Challenges and Impacts
A 24/7 trading model may also generate unexpected challenges and secondary effects. Continuous trading might alter market behavior as participants adapt their strategies during off-hours, potentially creating new correlations among asset classes or market responses that could deviate from patterns observed during traditional sessions. While these secondary impacts are theoretically plausible, empirical evidence remains limited; further modeling and stress testing would be essential to better assess these effects. Additionally, there is a higher risk of cascading technical failures; for example, a disruption during low-staffed periods could quickly escalate if backup systems or protocols have not been robustly tested for continuous operation.
Although such cascading failures are primarily speculative at this point, simulation-based
evaluations could help quantify their likelihood and potential impact. Secondary effects might include opportunities for regulatory arbitrage when oversight is reduced, or shifts in global operational procedures that disrupt established communication channels. These potential cascading impacts demonstrate the need for comprehensive risk assessment and precise planning beyond immediate technical and liquidity concerns.
Recommendations and Mitigation Strategies
Addressing the challenges of 24/7 derivatives trading and clearing requires a careful, step-by-step approach. Initiating pilot programs limited to select market segments or product types could provide a controlled environment to gather data on liquidity fluctuations, system performance, and market behavior during off-peak hours. Such pilots would enable market participants and regulators to refine risk management practices—including adjustments to margin requirements and collateral strategies—and could be complemented by simulation studies to further evaluate stress scenarios.
Alongside a phased rollout, it is vital to improve the technology and operational systems that support continuous trading. Market infrastructure must include robust real-time monitoring, automated risk controls, and proactive cybersecurity measures to prevent cascading technical failures or cyber threats. Updating staffing models and establishing clear protocols for coordinating with third-party service providers during nontraditional hours is crucial. Additionally, regulatory frameworks and customer risk disclosures should be updated to address the unique challenges of 24/7 operations clearly. By following these mitigation strategies, the industry can better balance the drive for innovation with the need to maintain market integrity and protect customers.
Conclusion
While adopting 24/7 derivatives trading can enhance market access and potentially support more timely price discovery, these benefits should be weighed against significant challenges that remain partly theoretical. Off-peak trading is expected to increase market and liquidity risks due to lower trading volumes, which could lead to faster and more volatile price swings and might even invite manipulative behavior.
This environment demands stronger risk controls, enhanced real-time monitoring, and updated margin and collateral strategies. Furthermore, while the amplification of risks during key expiration events—whether during double, triple, or quadruple witching—is plausible, more empirical research is needed to fully quantify these effects. A phased approach, beginning with pilot programs and supplemented with detailed simulation and stress testing, appears to offer the best chance to balance innovation with the need for market integrity and customer protection. These measures will help ensure that the drive for innovation does not compromise market integrity, operational robustness, or customer protection.
Thank you for considering my comments.
Michael Ravnitzky
Silver Spring, Maryland
