This article discusses the results of a Twitter poll about a hypothetical offer for commission-free SPY ETF trading. It is shown that performance since launch has been realized due to overnight gaps while regular trading hours show a small loss.
This is the Twitter poll with final results.
Imagine it's Jan 22, 1993, and to celebrate launch of SPY ETF your broker will refund commission and fees if you hold the ETF during regular trading hours, buy on open, sell on close, but do it every day until May 8, 2018, i.e., no overnight risk & no costs. Would you accept?
— Michael Harris (@mikeharrisNY) May 9, 2018
Half of 170 respondents rejected the offer and this was the correct answer. The daily chart below since SPY inception shows the per share dollar accumulation for regular trading hours (green line) and for overnight (red line) in the first indicator pane.
The ETF overnight accumulation is 263.13 versus -21.18 for regular trading hours. This means that the impact on price of regular trading hours has been negative. This is shown in the bottom pane: the black line is the ETF price and the red line shows the hypothetical price excluding the impact of regular trading hours. A black line moving close to red line shows a dependency of ETF price on the overnight accumulation only.
Therefore, action during the regular trading hours has been random with a negative bias. This is probably due to intraday traders and algos fighting a zero-sum game. The longer-term upward bias comes from dividends and overnight changes. Actually, the regular trading hours had a small positive impact on SPY price only during the 1990s.
Is the overnight effect tradable? The answer depends on the size of the affect and trading costs. In our premium reports we frequently include securities where the effect is tradable. Since there are daily transactions, trading costs have a major impact on hypothetical commission-free performance. Below is the equity curve of the overnight effect (buying on close and exiting on next open) assuming $0.01/share commission.
Performance is positive but the 0.08 MAR (CAGR/Max. DD) is worse than the 0.17 MAR of buy and hold. It really does not pay to try to take advantage of the overnight effect on daily basis. However, an important conclusion is that in the case of SPY and actually in many other securities and markets, there is not enough volatility in regular trading hours and intraday trading has limited potential due of that. Below is the equity curve of the offer in the Twitter poll above for buying on the open and selling at the close, commission-free:
Obviously, this is a losing proposition as 50% of the respondents replied. Another conclusion is that commission-free trading with the condition of not leaving open position in the overnight may be a losing proposition in some cases since there is not enough profit potential.
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