[Centigonal]

The author explains what he thinks is happening on page two of this paper (which he cites in the OP, but doesn't actually explain): https://arxiv.org/pdf/1912.01708.pdf

TL;DR: Stock prices in the US go up overnight and come down during the trading session. The only explanation must be that some shadowy trading firm with a lot of money is buying a bunch of $stock in the morning and selling it back later in the day (at a loss), because it inflates the value of their much larger stockpile of $stock that they hold onto overnight.

[galaxyLogic]

If they sell later in the day that should bring the price down. How does that increase the value of the stock overnight?

[Centigonal]

The paper asserts that, if you buy an amount of stock in the morning, that moves the price up more than selling the same amount of stock in the afternoon moves the price down.

To back up this assertion, the paper cites one of the author's previous publications from 2018, which in turn cites this WSJ article: https://www.wsj.com/articles/early-birds-suffer-in-market-14...

[galaxyLogic]

Thanks for the explanation. I looked at the WSJ link and it seems to be saying that volatility is higher in the morning than in the afternoon. That makes sense since in the morning it is less certain how the markets will go today whereas before the closing bell we have seen the market behave for 6 hours or so.

And if you trade when volatility is high you could think it has a bigger effect on the market than if you trade when volatility is low, because in a volatile environment other traders are more likely to react abruptly to any change.

But this only works if your trades are big enough to be noticed by other traders.

It all makes sense to me now. And it makes sense that big traders who think this is the case would try to take advantage of it (I don't think it can be made illegal, or is it already?).

Therefore we can assume that prices are artificially high in the morning, and so it makes sense for us small guys to sell in the morning, buy before the close -- if you are a small investor. The big guys will of course do the opposite, to accomplish their market-manipulation.

[sjg007]

I thought it was a volume thing? So overnight there are less shares to buy so they fetch higher prices. That then normalizes over the course of the day as more shares become available?