Every now and then you will see or hear about some frenzied "after-hours trading" or "pre-market activity" for certain stocks. You might also be wondering why you can’t get in on the action yourself. I thought I would give a brief overview of after-hours trading today.
What is it?
After-hours trading is supposed to refer only to the trading that takes place after the market closes (after 4pm), but it seems to be generally recognized as all trading that occurs outside of regular market hours (9:30am – 4:00pm). There are numerous names for it: After-hours trading, extended hours trading, late trading, and pre-market activity (in the mornings).
How did it originate?
It started out as trading between institutional players and high net worth individuals, but with the advent of ECNs (Electronic Communication Networks) and the quickly growing online investing industry, eventually it became available to the regular retail investor in the late 90’s.
How do you participate?
The only barrier to accessing the after-hours markets is the ability of your brokerage to access the ECNs (or allow YOU to access the ECNs through them). Other than that, you place your orders as normal, but you need to be aware of some dangerous pitfalls (see below).
What do you need to watch out for?
The first thing to note is that you may or may not have access to quotes (bid/ask) – these are known as dark liquidity pools. In other words, you can’t really see what is happening in the marketplace. This is one of the major reasons why it is widely regarded that limit orders (and not market orders) be used when trading after-hours.
The second thing to note is that the volumes of trades are much lower than during the regular trading hours as only a fraction of market players are active during the after-hours. When combined with the nature of dark pools, this allows for some fairly large spreads in bids and asks. Further, smaller retail investors may get caught out by the volatile environment if they don’t use limit orders (in fact some brokerages only allow the placing of after-hours trades with the use of limits).
Tread carefully, and consult with a qualified financial advisor before making any decisions about trading after-hours!
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