Why Schwab’s 24-Hour Trading Might Be a Bad Idea for Investors

Charles Schwab SCHW recently announced expanded overnight trading for all retail clients, allowing investors to trade a wider range of securities 24 hours, five days a week.

Opening the doors to investing to more people is usually a good idea, but in this instance, the overly generous accessibility may backfire.

That’s because the common behavioral challenges that investors face with their finances, such as chasing returns and herd behavior, are as pernicious as ever. When investors have access to features like 24-hour trading, these biases may be amplified—making it all too easy for investors to trade impulsively and act against their own best interests.

Faster to Act, Faster to Fall

Extending trading hours essentially brings down barriers to investing. And though breaking down barriers is often a good thing, in this instance, the barriers can remind an investor of the need to think twice. Without these roadblocks, we may be prone to "System 1" thinking.

System 1 thinking is the “fast thinking” side of our mind that relies on rules of thumb and mental shortcuts. This is the side of our mind that helps facilitate simple decisions, like, “This investment is hot, so I should jump on it.”

But as a result, this part of our brain can also be more impulsive and get us into trouble when making financial decisions. With Schwab’s changes, investors will no longer have a time buffer to help curb their reaction to recent events. When they have a trade idea at 8 p.m., they are no longer forced to “sleep on it.”

The ability to trade on a whim may prompt investors to act on gut reactions, whereas investing decisions should depend more on careful consideration and fundamental analysis.

Nothing Good Happens Between 8 P.M. and 3 A.M.

So, 8 p.m. may be a bit of a stretch here (I’m more of an early riser), but the sentiment holds.

Research has noted the detrimental effect that the time of day, and the fatigue that usually comes after hours, has on our decisions. Research on trading behaviors supports this notion, finding that investors are more likely to purchase riskier assets and hot investments when trading after hours.

Schwab has said that, during the pilot period, the most active trading hours of the overnight session were the first and last, between 8 p.m. and 3 a.m., thus, the demand it is seeking to harness.

What’s an Investor to Do?

Extending trading hours seems to be an ongoing trend among trading platforms, with Schwab following the lead of Robinhood HOOD and others. Although easier access to financial markets can benefit investors, it can also lead to financial mistakes.

Allowing eager investors to jump on market events may be the equivalent of lowering the guardrails that prevent chasing returns, falling prey to overconfidence bias, or following the crowd.

How can investors avoid falling into these pitfalls when making financial decisions?

Try disregarding these new trading hours. For example, continue functioning as if after-hours trades are still off-limits. This will give you some time to carefully consider a trade before acting.

Better yet, try implementing a three-day wait rule, where you can’t act on a hunch for three days. Take advantage of this cooldown period by using this time to research the assets in question (on sites such as this one, or even Schwab has offered educational content and 24-hour support for these purposes). During your research, make sure to incorporate perspectives that oppose your decision. This tactic will help you combat confirmation bias, which is our tendency to seek out or pay more attention to information that supports our opinion.