The long-observed tendency for U.S. stocks to gain the majority of their value overnight, rather than during trading hours, appears to be dissipating. This phenomenon, which fueled investor speculation and led to the creation of now-defunct ETFs, has been analyzed by economists at the New York Federal Reserve.

Previously, researchers suggested this "overnight drift" acted as compensation for market-makers absorbing end-of-day trading imbalances. They would carry risk overnight and profit when European investors began buying U.S. stocks in the early morning, causing a rebound. This effect became more pronounced with the advent of electronic S&P 500 futures trading in 1998.

However, a recent report indicates the overnight drift has significantly weakened since 2020. The Fed economists attribute this to a halving of end-of-day trading imbalances, reducing the premium market-makers could capture. The shrinking of this anomaly suggests a shift in market dynamics, potentially linked to increased capacity for market-makers to hold risk.

This development implies a normalization of stock price discovery, moving away from an arbitrage opportunity. Investors and traders should reassess strategies that previously relied on this predictable overnight price movement.