Subject: Trading - After Hours
Last-Revised: 7 Jan 2011
Contributed-By: John Schott (jschott at voicenet.com), Chris Lott (contact me), P. Healy, James Owens
After-hours trading has traditionally referred to securities trading that occurs after the major U.S. exchanges close. Until 1999, after-hours trading in the U.S. was mostly restricted to big-block trading among professionals and institutions. Much of this sort of trading was supported by electronic trading networks (ECNs). One of the oldest and best known ECN is Instinet, a network operated by Reuters that helps buyers meet sellers (there's no physical exchange where someone like a specialist works). Another is Island ECN, a relatively new network that (interestingly) has applied to the SEC to be a new stock exchange. With the advent of these ECNs where trades can take place at any hour of any day, time and place have taken on a reduced meaning.
Anyhow, until summer 1999, individual investors had no access to these trading venues. And it was only natural that some investors clamored for equal access to what the professionals had. Perhaps individuals felt that they would be able to pick up bargins in the after-hours trading as news announcements filter out and before stocks reopen on the following day. While that is highly unlikely (prices fluctuate after hours just as they do during the regular trading day), their wishes for equal access have been granted.
As of early 2003, there are basically three types of before-hours and after-hours markets, as follows.
- U.S. exchange after-hour markets
- The NYSE and ASE provide crossing sessions in which matching buy and sell orders can be executed at 5:00 p.m. based on the exchanges' 4:00 p.m. closing prices. The BSE and PSE have post-primary sessions that operate from 4:00 to 4:15. CHX and PCX operate their post-primary sessions until 4:30 p.m. Additionally CHX has an "E-Session" to handle limit orders from 4:30 to 6:30p.m.
- Foreign exchange after-hour markets
- Several foreign exchanges also trade certain NYSE-listed stocks. Hours are governed by those individual markets.
- ECN after hour markets.
- Electronic communication networks (ECNs) have allowed institutions to participate in after-market trades since 1975; individuals joined the party in 1999. Typically, extended-hour trades must be done with limit orders.
A short list of typical brokers that offer ECN access and the extended hours available is listed below. This list is meant to be illustrative, not exhaustive.
- Ameritrade (via Island ECN)
Hours: 8am-8pm Eastern; limit orders only during extended hours.
- E*Trade (via Archipelago ECN)
Hours: 8am-8pm Eastern; limit orders only during extended hours. Note that eextended-hours orders can be placed even during regular market hours; these orders may be filled during normal or extended-trading hours.
- Fidelity (via Redibook)
Hours: 7:30-915am and 4:15-8:00pm EST; restrictions on order types.
- Harris Direct (via Redibook ECN)
Hours: 8-9:15am and 4:15-7pm Eastern; limit orders only; round lots.
- Schwab (via Redibook ECN)
Hours: 7:30-9:15am and 4:15-8pm Eastern, Monday - Friday; limit orders only.
- TD Waterhouse (via ???)
Hours: 7:30-9:30am and 4:15-7:00pm EST
Most of the after-hours markets function as crossing markets. That is, your order and my opposing order are filled only if they can be matched (i.e., crossed). In an extreme example, the new Market XT requires ONLY limit orders.
The concept of trading after exchange hours seems attractive, but it brings with it a new set of problems. Most importantly, the traditional liquidity that the daily market offers could suffer.
I want to digress into a quick review of the mechanisms on the NYSE and NASDAQ that provide for liquidity and buffering, mechanisms that are mostly absent on the ECNs. In the case of the New York exchange, the specialist ("specs") there are required to act as buffers by buying and selling for their own accounts. This serves to smooth out market action. (Whether they do in times of stress is doubtful, but that's another matter entirely.) In the case of the NASDAQ, an all-electronic exchange, many firms may offer to "make a market" in a specific stock. They post buy and sell offers on a computer system and when there is a matching counter offer, the trade is made. Meanwhile, onlookers can see the trading potential of all available bid and ask quotations - a decidedly different situation than on the NYSE. But note that the NASDAQ system has no buffering built in (no market maker is required to buy or sell).
Now, in the new, non-exchange operations with limited information, limited participation, and what is effectively unbuffered, person-to-person trading, it's quite reasonable to expect that liquidity will be poor. Unlike the NYSE's specialist system and the NAQDAQ's market-maker system, where the daily market can readily accomodate small orders, the after-hours market will be quite different -- operations are quite literally in the dark. What we can see is effectively a reduction in apparent liquidity in normal trading as we slide down the trading scale (from the NYSE to the after-hours ECNs). On the NYSE there theoretically is always a bid and ask about the present market price, but may not be the case in less liquid markets. Ultimately, as seems to be the case on some ECNs today, we get to the basest market - you and I trading privately. Either we agree or there is no transaction. It can get to be a jungle.
Furthermore, Instinet, Island and all the other ECNs don't have a common reporting structure as do NASDAQ and NYSE. That is, the prices and volumes on one ECN might be different from that on another ECN. Since only a few of the biggies have access to multiple ECNs there can be a chance for arbitrage, which means buying in one place at one price and selling substantially the same thing somewhere else for a different price, all in essentially the same time frame in the case of ECNs.
The effect is widened spreads, irregular trading, and a chance for the unwary (read you and me) to get slightly whacked.
There are other issues as well, of course. At night, the information resources and public attention that the established exchanges offer today will be operating at a low level. Today, Microsoft, Intel, or Dell likely make important announcements during the quiet hours after the exchanges close. That gives the investment community time to access and evaluate the news. Now drop the same announcement into an environment of several uncoordinated after-hours exchanges. Favorable news may create such demand that it overwhelms the supply offered by now reluctant sellers. Prices could zoom, only to crash back as more sellers show up. Lack of full information and considered analysis could make the daily gyrations of hot stocks like Amazon.com and new IPOs look boring.
Making things yet less transparent, if I understand it correctly, trades made on these markets are not part of the reported closing prices you see in the newspapers. The data is apparently reported separately, at least on professional-level data systems.
Finally, consider the effect on both the industry and private traders who now face an extended trading day. Presumably the extended day will offer even less time for reflection, research, and consideration. Do the pros stay glued to the tube while eating carryout? Do they employ a night shift to babysit things? And what about the day workers who now come home to an evening of trading stress? Thus expanded market hours may not be the blessing that some expect, only another hazard in today's stressful life.
Meanwhile the SEC is pushing for some rules and regularity. To get the blessing as a recognized exchange, expect that the SEC will insist on a public ticker system (ultimately I’d expect ONE unified quote system incorporating all of todays exchange's and the ECNs.) Logically, this leads to expectation of a unified market, and represents a significant threat to existing markets like the NYSE.
Certain indications suggest that extended hours will become even more extended (possibly approximating a 24 hour market) in the foreseeable, though perhaps remote, future. In the past few years, market forces have constricted efforts to further extend trading hours, but a strong enough future bull market would almost certainly reverse that trend.
Finally, the term "after-hours" trading is becoming rapidly out of date. Consider DCX (Daimler-Chrysler), which is traded in identical form on 11 worldwide exchanges in Asia, Europe, and the Americas. For this stock, the winding down of the day's trading in New York seems an anticlimax to a day that's already over in Tokyo.
Here are a few more resources with information.
- The NASDAQ's page on after-hours trading.
- Instinet runs a site with some information about their operations.
- The New York Times gave an update about electronic stock
exchanges on Jan 2, 2011 in an article titled "The New Speed of
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