After-Hours Trading: Wall Street’s Second Shift
A Wall Street trader’s day was once bookended by the New York Stock Exchange’s opening and closing bells. The opening bell rang at 9:30 a.m. ET, setting off the hullabaloo of trading on the crowded exchange floor while the closing bell sounded at 4 p.m. ET, halting activity on the floor.
The number of exchanges has multiplied, but they all still follow the same regular trading session schedule, even if the new venues don’t have a physical trading floor. Historically, some trading took place outside the regular trading session, but such activity was generally limited. However, as the number of venues has multiplied, most recently to include so-called alternative trading systems (ATSs), activity during non-market hours has become more widespread.
The changes date back to the 1990s, when new technology smoothed the way for the development of electronic communication networks (ECNs), a type of ATS which generally uses computer technology to automatically match buy and sell orders. Add to that the proliferation of registered exchange trading venues and the growth of other types of ATSs, and you had a recipe for growth in trading outside of normal market hours.
Trading activity that takes place early in the morning before the traditional session is commonly referred to as pre-market trading while trading that occurs after the 4 p.m. bell is known as post-market or after-hours trading. Any activity that takes place outside of traditional trading hours is also sometimes referred to as extended hours trading, or simply after-hours trading.
The differences between extended hours trading and regular session trading, however, include more than just timing. If you’re considering pursuing pre-market or after-hours trades, here are a few things to consider:
Pre-market and post-market trading is less liquid. Despite the increasing amount of pre-market and after-hours trading activity, that activity is still dwarfed by the tens of millions of transactions that typically take place during a normal trading session. Those seeking to buy or sell securities in the early morning or evening may find comparatively fewer counterparties, making it more difficult to execute a trade at your desired price.
Extended hours trading activity is often more volatile. Because fewer trades occur during pre-market and after-hours activity, stocks may be vulnerable to wider swings. Stocks may also be subject to more volatility during extended hours trading because of the speed with which some investors react to major events, such as earnings announcements, which often take place before or after standard trading hours.
For example, a firm that reports disappointing earnings after the market closes may see a rapid decline in its share price during after-hours trading in reaction to the headline numbers. Once investors have time to review more information about the results, however, trading may become smoother when regular trading hours resume.
Markets may be unlinked. The price displayed on one after-hours trading venue may vary from the price currently available on other after-hours trading venues. During the normal trading day, brokers must guarantee customers the best price at the time — known as the National Best Bid and Offer, or NBBO — but that requirement doesn’t carry through to extended-hours trading sessions. That means that you risk trading at a price that isn’t the best possible price available at that time.
After-hours trading doesn’t change exchanges’ official closing prices. The share prices recorded at 4 p.m. at the NYSE and Nasdaq on a given day are considered the official closing prices for that day, regardless of what happens during after-hours trading. These official prices are what investment funds use to calculate the value of their holdings at the end of a day. The after-hour trading activity may also not reflect the price at which the stock opens in the morning.
Stock options generally do not trade pre-market or after-hours, though there are some exceptions. In 2015, the Chicago Board Options Exchange began offering extended trading hours for its popular S&P 500 index and Volatility Index (VIX) options.
Your brokerage firm may set specific parameters for pre-market trading and after-hours trading. Rules among brokers about when and how clients may participate in pre-market and after-hours trading may vary. A broker, for instance, may impose set times for after-hours trading — from 4 p.m. to 8 p.m., for instance — and limit trading activity to a specific trading venue. Brokers may also prohibit pre-market and post-market trading completely. All brokers, however, must advise customers of the risks of trading after hours, per FINRA rules. Check with your broker to determine your choices for trading outside of traditional market hours.
