24/7 Trading in Traditional Markets: Balancing Systemic Risks and Alpha Generation in a Regulated Landscape

The U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) are spearheading a historic shift toward 24/7 trading in traditional financial markets, aiming to align with the non-stop nature of global and cryptocurrency markets [1]. This regulatory overhaul, driven by the need to modernize U.S. capital markets and foster innovation, raises critical questions about systemic risk and the potential for alpha generation. While proponents argue that continuous trading enhances liquidity and competitiveness, critics warn of amplified volatility, operational vulnerabilities, and the need for robust investor protections.

Alpha Generation: HFT, AI, and the 24/7 Edge

The transition to 24/7 trading creates fertile ground for high-frequency trading (HFT) and AI-driven strategies. According to a report by LinkedIn, HFT market-making strategies have historically outperformed manual trading by significant margins—generating a 34.6% annualized return over six months versus 12.8% for traditional methods [2]. These strategies thrive on microsecond-level price discrepancies and real-time data processing, advantages that become even more pronounced in a continuous trading environment.

AI further amplifies these opportunities. Machine learning models, including reinforcement learning and natural language processing (NLP), enable traders to parse unstructured data (e.g., news, earnings calls) and adapt to shifting market conditions [3]. Generative AI tools are also streamlining portfolio management and compliance, allowing firms to automate risk assessments and optimize trade execution. For instance, blockchain-integrated HFT systems reduce latency and improve settlement efficiency, offering a competitive edge in 24/7 markets [4].

The SEC and CFTC’s proposals to relax rules on perpetual derivatives and DeFi protocols could further expand these opportunities. By harmonizing margin requirements and easing restrictions on cross-asset strategies, regulators aim to lower capital inefficiencies and boost liquidity [5]. However, these changes also raise concerns about market integrity, particularly in decentralized systems where automated liquidations and smart contract vulnerabilities could accelerate downturns [6].

Systemic Risks: Liquidity, Volatility, and Crosstagion

While 24/7 trading promises efficiency, it introduces systemic risks that regulators must address. Traditional finance (TradFi) is no stranger to liquidity crises and cascading failures—events like the 2008 financial crisis underscore the dangers of interconnected institutional exposures. In decentralized finance (DeFi), similar risks manifest through algorithmic liquidations and composability, where smart contracts trigger rapid asset depreciation during downturns [7].

A key concern is crosstagion—the bidirectional transmission of instability between TradFi and DeFi. For example, stablecoins and tokenized assets serve as bridges between these ecosystems, meaning a shock in one could destabilize the other [8]. The CFTC’s Acting Chair, Caroline Pham, has emphasized the need for robust system resilience, including mirrored trading platforms and real-time surveillance, to mitigate such risks [9].

Quantitative analyses highlight the volatility challenges. A study on TradFi and DeFi risks notes that automated liquidation mechanisms in DeFi can mimic fire sales in traditional markets, exacerbating downturns [10]. Meanwhile, 24/7 trading could amplify liquidity strains during off-peak hours, when fewer participants are active. The CFTC’s recent focus on margin adequacy and portfolio margining frameworks aims to address these gaps, but implementation will require years of infrastructure upgrades [11].

Regulatory Harmonization: A Path Forward

The SEC and CFTC’s joint efforts to harmonize oversight—such as aligning product definitions and streamlining reporting requirements—signal a commitment to balancing innovation with stability [12]. A September 2025 roundtable will address priorities like onshoring perpetual contracts and developing unified margin rules, reflecting the agencies’ recognition of cross-market interdependencies [13].

However, regulatory challenges persist. The CFTC’s Foreign Board of Trade (FBOT) framework, designed to bring offshore crypto exchanges under U.S. jurisdiction, has been criticized as impractical for blockchain-based platforms [14]. Similarly, easing rules for perpetual derivatives without addressing information asymmetry could favor institutional investors over retail participants [15].

Conclusion: Innovation vs. Stability

The push for 24/7 trading represents a pivotal moment for U.S. capital markets. While it unlocks alpha generation through HFT, AI, and DeFi integration, it also demands rigorous risk management. Regulators must ensure that infrastructure upgrades—such as real-time surveillance and failover mechanisms—keep pace with the speed of continuous trading [16]. For investors, the key lies in leveraging technology to navigate volatility while advocating for policies that prevent systemic spillovers.

Source:
[1] SEC, CFTC Propose Making US Financial Markets 24/7 to Keep Up with Crypto [https://decrypt.co/338264/sec-cftc-propose-u-s-financial-markets-24-7-keep-crypto]
[2] The Quantitative Edge: How High-Frequency Trading and Market-Making Strategies Outperform Manual Trading [https://www.linkedin.com/pulse/quantitative-edge-how-high-frequency-trading-market-making-zhemerov-quhuc]
[3] AI Use-Case Compass — Finance: Algorithms to Alpha [https://medium.com/@adnanmasood/ai-use-case-compass-finance-algorithms-to-alpha-bd323d37ffb4]
[4] Leveraging Blockchain in High Frequency Trading for Shaping Market Behavior and Enhancing Portfolio Returns [https://www.researchgate.net/publication/393326821_Leveraging_Blockchain_in_High_Frequency_Trading_for_Shaping_Market_Behavior_and_Enhancing_Portfolio_Returns]
[5] SEC, CFTC Set Out Priorities for Harmonization [https://www.marketsmedia.com/sec-cftc-set-out-priorities-for-harmonization/]
[6] Mapping Microscopic and Systemic Risks in TradFi and DeFi [https://arxiv.org/html/2508.12007v1]
[7] Ibid.
[8] Ibid.
[9] Innovation and Market Structure: Keynote Address by Acting Chairman Caroline D. Pham [https://www.cftc.gov/PressRoom/SpeechesTestimony/opapham16]
[10] Ibid.
[11] U.S. CFTC Opens 30-Day Window for Comment on 24/7 Trading and Perpetual Derivatives [https://www.sidley.com/en/insights/newsupdates/2025/04/the-us-cftc-looks-to-the-future-opens-30-day-window-for-public-comment]
[12] SEC, CFTC Outline Plan to Harmonize Regulatory Appraisal [https://www.doddfrankupdate.com/dfu/articlesdfu/sec-cftc-outline-plan-to-harmonize-regulatory-appr-95370.aspx]
[13] Joint Statement from the Chairman of the SEC [https://www.cftc.gov/node]
[14] FBOT Registry Won’t Bring Offshore Crypto Exchanges to US [https://cointelegraph.com/news/fbot-won-t-bring-offshore-crypto-exchanges-us]
[15] Major Regulatory Shift in Financial Markets: Embracing 24/7 Trading [https://www.onesafe.io/blog/247-trading-impact-on-crypto-and-traditional-markets]
[16] 24/7 Trading: CFTC's Blueprint for Continuous Derivatives Trading and Resilient Regulation [https://www.niceactimize.com/blog/fmc-24-7-trading-cftcs-blueprint-for-continuous-derivatives-trading-and-resilient-regulation/]