After hours trading stocks
Trading in United States stocks outside of regular market hours is not a new phenomenon. For years, institutional investors and market professionals have sent their after hours orders to broker dealers for execution on Electronic Communication Networks or non US markets.
Alternative trading systems, known as Electronic Communication Networks, have become integral to the modern securities markets, providing investors with enhanced flexibility and reduced trading costs, as well as competition to the established securities exchanges and the NASDAQ Stock Market. These markets participants traditionally have been willing to accept the risks of trading outside of regular market hours, including the potential price volatility and lack of liquidity, because they operate sophisticated worldwide trading strategies that require them to make 24 hour adjustments to their portfolios and risk containment hedges.
ABOUT AFTER-HOUR TRADING :
Many institutions and professional traders also adjust their portfolios and hedges by trading stock index futures, many of which trade at night on automated systems operated by futures exchanges. In addition, portfolio hedges are often adjusted through after-hours exchanges of stock index futures with baskets of underlying stocks. Most of these basket trades are affected after-hours on foreign markets such as London and Tokyo. Moreover, many of these institutions avoid market risks by negotiating the execution prices of their after-hours trades beforehand.
One big reward of after hours trading is that traders can take advantage of news events such as earnings and other announcements that commonly occur after the markets close. An investor trading during traditional market hours must wait until morning to buy or sell a favorable or unfavorable position. Those investors whose accounts are linked through their brokers to an E lectronic C ommunication N etworks can make their transaction immediately upon bearing the news.
Another version of extra hours trading is premarket trading, essentially the same as after hours trading, but commencing at seven o ?clock in the morning eastern time. This is convenient for many on the east coast who wish to trade for an hour or so before heading to work in the morning.
STRUCTURE OF THE AFTER-HOURS MARKET :
It is important to keep in mind that there are several different trading venues in the current after-hours market in US stocks. While media reports can give the impression that all after-hours volume is handled electronically by Electronic Communication Networks, the actual post 4-00 p.m. trading environment is more complex. Electronic Communication Networks have been active for years in the after-hours market for NASDAQ securities. These services are used by market makers and other broker-dealers, as well as by Electronic Communication Networks, to trade after the 4-00 p.m. close of the regular trading session.
TRADING DYNAMICS OF THE AFTER-HOURS MARKET :
After-hours trading remains a MARKET OF STOCKS rather than a true STOCK MARKET. While further enhancements to market transparency and advances in linkages among after-hours trading venues may improve the liquidity of this market in the years to come, full-fledged 24 hour a day trading in US stocks remain in the future.
UNDERSTANDING THE RISKS:
While after-hours trading presents investing opportunities, there are also the following risks for those who want to participate :
1. Inability to see or act upon quotes: Some firms only allow investors to view quotes from the one trading system the firm uses for after-hours trading.
2. Lack of Liquidity: Liquidity refers to the ability to convert stock into cash. That ability depends on the existence of buyers and sellers and how easy it is to complete a trade. During regular trading hours, buyers and sellers of most stocks can trade readily with one another. During after-hours, there may be less trading volume for some stocks, making it more difficult to execute some of the trades. Some stocks may not trade at all during extended hours.
3. Larger Quote Spreads: Less trading Activity could also mean wider spreads between the bids and ask price, with the result, it will be difficult to get the order executed or to get a favorable price as it could be during regular market hours.
4. Price Volatility: For stocks with limited trading activity, there can be greater price fluctuations that during the regular trading hours.
5. Uncertain Prices: The prices of some stocks traded during the after-hours session may not reflect the prices of those stocks during regular hours, either at the end of the regular trading session or upon the opening of regular trading the next business day.
6. Bias Toward limit orders: Many electronic trading systems currently accept only limit orders in which case the limit order does not ensure for payment for more than the price entered or sell for less.
7. Competition with Professional Traders: Many of the after-hours traders are professionals with large institutions, such as, mutual funds, and may have access to more information than individual investors.
8. Computer Delays: As with online trading, we may encounter delays during after-hours or failures in getting the order executed, including orders to cancel or change the trades. In some after-hours trades, the order will be routed from the brokerage firm to an electronic trading system and in case of any problem with the computer ; the order may not reach the system. This could only be corrected by calling a broker to determine the extent of the problem and get the order executed.
CONCLUSION:
Despite recent advances in trading venues and enhanced market transparency, the after-hours market in stocks remains an often illiquid and volatile market that requires retail investors to exercise caution when attempting to capture short term profits by trading after the major markets close. Even in relatively liquid stocks, steep after-hours price swings can surprise investors that base their trading decisions on the regular session ?s closing prices. In less liquid stocks, investors need to be even more cautious to avoid receiving surprisingly unfavorable prices after the regular session close.
Nevertheless, the commission recognizes and supports investor choice in trading hours provided that essential protections for investors and the markets are not compromised. In today's technology and the global nature of the current securities markets, it is inevitable that some investors would seek expanded opportunities to effect their securities transactions outside of traditional market hours. The Commission has supportive initiatives by the securities markets and the Electronic Communication Networks that promise to give investors the benefits of expanded competition among trading venues and increased flexibility in the timing of their trades.
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