Why Do the Pit Hours Outlive the Pit?

Abstract

We study why a majority of trades happen during the pit hours, i.e. when the trading pit is open. We examine the case of 30-year U.S. Treasury futures. The pit hour activity clustering cannot be explained by the informativeness of pit trading or the liquidity. Instead, a feedback mechanism between price informativeness, information asymmetry, price impact of trades and trading activity explains why the pit hours outlive the pit. In the recent years the negative effect of price impact on trading activity ceases to be a significant factor, likely due to improvements in electronic trading infrastructure and order execution algorithms.

Keywords: Afterhours Trading, Market microstructure, Kalman filter

JEL Classification: C32, G14