For most people daylight savings might just mean an extra hour in bed, a quick watch wind – or, if you’re anything like me, the relief of your car finally displaying the right time again (it’s been an hour out since March). But for regulated entities, the clocks going back can be a serious headache in terms of trade reporting. And – shock horror – could it really also affect returns?
The clocks go back at 2am tomorrow morning, 29 October 2023. A minor inconvenience for some, a welcome hour in bed for most – but for traders a potentially major headache, and not just in terms of trade reporting, with sleep disruption also cited as a factor contributing to lower returns and disrupted volatility in the days following the clock shift.
Compliance concerns
“Time has been a bug bear for reporting for many years as the transactions all have time stamps on them as they move through the architecture within firms, from trade capture through to settlement/books and records,” explained Matthew Vincent, managing director of Kaizen Reporting, speaking to BEST EXECUTION.
The issue arises as these timestamps are often in different time zones to UTC so firms have to make sure the time is consistent throughout. Challenges can arise when, for example, venues change the time zone used on the execution messages without warning downstream consumers of the data (which has, on occasion, happened in the past).
“Time is obviously also vital to regulators when looking for instances of market abuse, e.g., trading ahead of company announcements,” pointed out Vincent.
Numerous regulators have raised concerns in recent years around incorrect time settings in trade and transaction reporting.
The UK’s Financial Conduct Authority (FCA) in its 2019 Market Watch specifically referred to inaccuracies stemming from daylight saving (DST) changes, noting that: “We continue to see errors in transaction reports when UK clocks transition to and from British Summer Time, as well as errors driven by inaccurate clock synchronisation. Firms should have arrangements in place to ensure consistent and accurate reporting of trading date and time.”
The regulator also warned that: “Firms should not assume that a report was accurate because it was accepted by the Market Data Processor, as business validation rules are not intended to identify all errors and omissions.”
Luxembourg’s CSSF has also zeroed in on the issue, performing a number of data quality tests on transaction reports that show inaccurate time entries recording local time instead of Coordinated Universal Time (UTC).
Regional differences
To add to the confusion, the US also observes daylight savings (although not all of it – Arizona and Hawaii don’t bother) but do not usually introduce it at the same time, meaning there is a week in between when trading hours between the US and UK are different. For example, this year the UK will put the clocks back by an hour on 29 October 2023, while the US will follow suit on 5 November.
This means that for a week, the trading time between New York and London overlap by an hour less than usual, which can lead to lower trading volume, reduced liquidity and subsequent price implications – especially for FX.
“Daylight savings is bad for trading,” said Kathy Lien, managing director of FX strategy at BK Asset Management in New York in an explanation of DST impact.
“It messes with the trading calendar. The time difference between New York and other regional locations like London or Hong Kong changes, which can create confusion and potential mis-trading opportunities. The week between when the US and Europe change their clocks can be particularly messy.”
Market impact
Daylight savings also messes with the stock market, with the S&P typically dropping around a quarter percent the weekend following.
A study (‘Losing Sleep at the Market: The Daylight-Savings Anomaly’ by Kotchen and Grant at Yale University) exploring the impact of the clock change on the New York Stock Exchange (NYSE) between 1964 and 2012 found that prices tend to dip in the week following a clock shift – most noticeably on the Monday following the shift, with an average decrease of 0.31% in stock price, even after controlling for other factors. Kotchen and Grant suggest that this could be down to sleep disruption affecting traders’ decision-making capabilities.
“In international markets, the average Friday-to-Monday return on daylight-savings weekends is markedly lower than expected, with a magnitude 200 to 500 percent larger than the average negative return for other weekends of the year,” said the researchers.
“This ‘daylight-savings anomaly’ in financial markets is consistent with desynchronosis research, which has identified the effects of changes in sleep patterns on judgment, anxiety, reaction time, problem solving and accidents. [We] suggest sleep effects of daylight-savings time changes may be impacting market participants internationally.”
Another study by Kamstra, Kramer and Levi also argued that DST changes affect the relationship between stock market return and volatility. “Empirical evidence suggests that the positive relationship between return and volatility becomes negative on the Mondays following DST changes,” said the researchers. “There remains statistically significant evidence of an economically large negative daylight-saving effect in U.S. stock returns.”
Nor is the retail market immune. A study by the JP Morgan Chase Institute a few years ago found that credit card spending fell by a pronounced 3.5% in the 30 days following the autumn clock shift, with consumer goods the most severely impacted.
Planning ahead
The impact might only be temporary but every bip counts, especially in today’s market conditions. So what can you do to plan ahead?
On the transaction reporting front, the steps are pretty simple – make sure your trade reporting time settings are correctly synchronised to UTC (as required by both the FCA and ESMA), cross-check trade times with MiFIR, EMIR and SFTR trading date time fields, and double-check any daily transaction snapshots to make sure the end-of-day time is accurate.
The impact on returns is slightly harder to quantify, but forewarned is fore-armed… so maybe go to bed an hour earlier (or later) tonight, just to be on the safe side. And if the market is set to slide next week, if all else fails, get ready to buy the dip?
©Markets Media Europe 2023
