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After-hours dealing
Published: 02/05/2020

 

Quick Summary: After-hours trading involves buying or selling securities outside of specified trading hours. However, trading after hours may offer less liquidity, as fewer traders are operating at these times and spread betting firms may offer wider spreads as fluctuations can occur during these times.

Overview: Trading can be fun and interesting. But, did you know that you can extend that trading excitement even after the closing bells of an exchange? 

This can be done with extended hours trading. This allows traders to trade either before the open of an exchange or after the close of an exchange through specialised electronic networks. In the following lines, we’ll cover what after-hours trading is, how does it work, and what its main advantages and disadvantages are.

 

What is After-Hours Trading?

After-hours trading refers to extended hours trading that takes place either before or after the market closes, allowing traders and investors to trade financial instruments outside regular market hours. Most major stock exchanges offer after-hours trading, including the New York Stock Exchange and Nasdaq.

After-hours trading became increasingly popular in the 90s with the emergence of ECNs (Electronic Communication Networks.) Up until that time, after-hours trading has mostly been used by institutional investors and high-net-worth individual investors who wanted to buy or sell securities in a convenient and anonymous way when important news reports came out.

Both the NYSE and Nasdaq have regular market hours that span from 9:30 a.m. to 4:00 p.m. Eastern Time. After-hours trading allows traders to place trades pre-market, before the opening of the exchange at 9:30 a.m., and post-market, after the exchange closes at 4:00 p.m. and until 8:00 p.m. Trades that are placed after-hours don’t go directly through an exchange, but are routed through electronic communication networks that are designed to match interested buyers and sellers. 

While prices do regularly change during extended hours trading, the opening price for a stock is still the first price traded during regular market hours, and the closing price of a stock is the last price traded before a stock exchange closes at 4:00 p.m.

Although after-hours trading offers the convenience and flexibility to place trades after regular market hours, it doesn’t come without drawbacks. We’ll cover the main advantages and disadvantages of after-hours trading further below.

 

Read: We Answer Your Question – Can You Trade on the Weekend?

 

How Does After-Hours Trading Work?

Extended hours trading allows traders to place trades outside regular market hours, either pre-market or post-market (after-hours). Pre-market trading takes place between 4:00 a.m. and 9:30 a.m. before the opening of a new trading day, but the largest number of orders is usually placed at 8:00 a.m.

After-hours trading takes place between 4:00 p.m. and 8:00 p.m. It’s important to note that market makers usually don’t participate in after-hours trading. This can significantly reduce liquidity and increase the volatility of the market. In addition, all market participants who are involved in extended-hours trading are required to comply with all relevant FINRA rules, including limit order protection and display rules.

The emergence of ECNs has made after-hours trading possible without using a traditional stock exchange. Due to the lower liquidity and smaller number of market participants, volatility can be quite high during after-hours trading. However, for an investor, it doesn’t make a difference whether the price changes during regular market hours or during extended hours. A $1 increase during after-hours is the same as a $1 increase during regular trading hours. 

Nevertheless, if after-hours traders push the price higher in anticipation of better-than-expected quarterly earnings, traders who are taking profits in pre-market hours may push the price lower again before the stock exchange opens, bringing it closer to the previous day’s closing price.

 

What is an ECN?

Electronic communication networks form the backbone of extended-hours trading. ECNs are electronic networks and computer systems that match buyers and sellers without using a regular stock exchange. 

ECNs are connecting major brokerage houses, institutional investors, and individual traders with each other, creating a pool of liquidity and allowing all ECN participants to trade directly with each other without going through a middleman. Given their role in the market, the US Securities and Exchange Commission requires all ECNs to operate as regulated and registered broker-dealers.

ECNs charge a fee for each executed transaction which is usually lower compared to regular brokers. They also allow market participants to trade outside regular market hours by automatically matching buyers and sellers in the networks. The most popular orders used with ECNs are limit orders which, if executed, are matched with a counter-party that offers the best available counter-order from the liquidity pool.

Another advantage of ECNs is that they can provide a certain level of anonymity to involved participants, which is especially important for large institutional investors that want to execute a large volume of trades. The main drawbacks of ECNs are the costs, as access fees and wider spreads can significantly eat into your bottom line. 

 

Read:

Secret Practice to Watch Out For With Your Broker

How on Earth do Brokers Make Money?

How to Guide on Choosing a Broker Platform

 

Advantages of After-Hours Trading

After-hours trading has some notable advantages over trading during regular market hours, such as the ability to quickly react to important market news, anonymity in executing large market orders, and the flexibility to trade on one’s own schedule.

Reacting to Breaking News: Trading after the closing bells of a regular stock exchange allows traders and investors to quickly react to important news, market reports, or unexpected developments in the global market. Say, for example, news hit the market that Apple’s earnings are expected to decrease below expectations because of disruptions in the company’s supply chain. 

Traders who are involved in after-hours trading through ECNs can immediately react to that news, having an important advantage over traders who trade only during regular market hours. Similarly, if important news comes in overnight from other parts of the world, traders can react to that news in pre-market trading, between 4:00 a.m. and 9:30 a.m. (times vary depending on your broker).

Anonymity: An important advantage of extended-hours trading is anonymity. Electronic communication networks can provide a certain level of anonymity for large institutional investors or high-net-worth individual traders who want to execute a large order. This anonymity allows them to stay under the radar and execute large trades without significant price disruptions.

Flexibility: After-hours trading offers flexibility and convenience for global traders who’re not able to participate during regular market hours. Traders around the globe, regardless of their timezone, can place trades from 4:00 a.m. Eastern Time (start of pre-market trading) to 8:00 p.m. Eastern Time (end of after-hours trading), giving them a total of 16 hours during which they’re able to execute their ideas.

 

Disadvantages of After-Hours Trading 

After-hours trading also comes with certain disadvantages that every trader who wants to participate in those trading hours need to be aware of. The most important drawbacks of after-hours trading are wider spreads, lower liquidity and higher volatility of prices.

Wider Spreads: The lower trading volume and the smaller number of market participants involved in after-hours trading can lead to substantially higher spreads compared to regular market hours. The difference between the bid and ask prices depends on the number of traders and their trading interest at every single price-level. For example, if you want to buy during after-hours trading but there are not enough sellers interested to sell to you, spreads will widen and you won’t be able to execute your idea at a favourable price. 

Liquidity: Due to the smaller number of traders who are active on ECNs during after-hours trading, liquidity can sometimes be quite low. Liquidity refers to the total number of market participants willing to transact in a market. When liquidity is low, large market orders can significantly move prices up or down if there are no counter-parties interested to take the other side of the trade. The absence of market makers during after-hours trading intensifies this problem even more.

Higher Volatility: Lower liquidity leads to higher volatility in prices. If there are not enough buyers or sellers at a given price level, prices will move until they find an equilibrium level that can be substantially different from recent prices. While higher volatility can lead to profitable trading opportunities if you’re on the right side of the market, risk-averse traders will likely be better off trading during regular market hours.

 

After-Hours Trading Example

After-hours trading works similar to trading during regular market hours, only that it’s facilitated by an electronic communication network. Some popular ECNs include Instinet and SelectNet, and some FX brokers are also operating as ECNs, routing currency trades directly to the network to find suitable matches. 

Due to the lower liquidity of after-hours trading, traders should stick to larger stocks of highly-liquid companies, such as Amazon and Apple for example. Both companies are popular choices for traders around the world and are good candidates to trade when the traditional stock exchange closes.

A trader who wants to buy Amazon stocks could simply place a limit order on an ECN, which would then get executed once the price reaches the pre-specified level and the buying order gets matched with a selling order. Most stockbrokers offer after-hours trading nowadays.

 

Read: Top Futures Trading Strategies That Will Increase Your Bottomline

 

Schedule of After-Hours Trading

Here’s a table of after-hours trading for the NYSE and Nasdaq. The exact extended trading hours vary from exchange to exchange, so if you’re trading on other exchanges, check the exact after-hours trading period on their websites.

 

New York Stock Exchange

Standard Trading

After-Hours Trading

Pre-Market Trading

9:30 a.m. – 4:00 p.m. ET

4:00 p.m. – 8:00 p.m. ET

7:00 a.m. – 9:30 a.m. ET

 

Nasdaq

Standard Trading

After-Hours Trading

Pre-Market Trading

9:30 a.m. – 4:00 p.m. ET

4:00 p.m. – 8:00 p.m. ET

4:00 a.m. – 9:30 a.m. ET

 

Final Words

Extended hours trading allows traders to trade either before the beginning or after the close of regular market hours. Extended hours trading can be divided into pre-market trading, which takes place before 9:30 a.m., and after-hours trading, which is open from 4:00 p.m. to 8:00 p.m for most stock exchanges. Bear in mind that actual hours may vary from exchange to exchange, so make sure to check the website of your desired exchange before getting involved in extended-hours trading.

Both pre-market and after-hours trading comes with certain advantages and disadvantages. The main advantages include the ability to react to breaking and important news, anonymity, and flexibility. Notable disadvantages are wider spreads, lower liquidity due to the smaller number of market participants, and higher volatility of prices.

Nevertheless, pre-market and after-hours trading is a great way to participate in markets through ECNs after the close of regular stock exchanges, allowing traders to react on important news and find profitable trading opportunities almost 24 hours a day.

 

Read: These Are Situations When You Should NOT Trade Forex

 
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