By John Koscis
New investors familiarizing themselves with the world of equity markets may find themselves confused as to why they can only trade during specified market hours. In this age of the 24-hour news cycle, they probably wonder why they cannot instantly react to something they see on CNBC.
Wall Street is Modernizing
The answer is rooted in the history of Wall Street, as it used to be impossible to employ a trader outside of the business hours of 9:30 to 4:00 EST. Astute investors will notice that this timeframe no longer depicts the entire story of the stocks in their portfolio. Eagle eyes can catch times at which the opening price of a stock differs significantly from the closing price the day before. Obviously, transactions are occurring between the time traders go home in the afternoon and the time they get back the next morning. As it turns out, Wall Street is modernizing. Since the late 1990s, amateurs have been using the Internet to make investments. Americans use the Internet well after the duration of the workday and seek the opportunity to trade for extended hours. The stock market now accommodates these desires-after-hours trading occurs from 4:00 to 8:00 pm and pre-market trading takes place at 7:00 to 9:30 am. Investors now have the opportunity to trade beyond standard business hours.
The Technological Breakthrough
Throughout Wall Street's history, high net-worth investors and institutions have largely been able to trade at will. Small-time investors simply did not have access to the mechanisms to buy or sell outside of calling a trader during business hours. Today, the dawn of the Internet has alleviated such issues. More households now have the opportunity to trade in the extended hours. The invention of electronic communication networks, or ECNs, facilitates this innovation. ECNs are venues through which individual investors can access the market after the trading day. Interested individuals can gain access through these networks by employing a brokerage firm that has institutional access or simply by purchasing access.
Leave it to the Professionals
For the most part, after-hours trading is seldom discussed in the mainstream media. This is because using ECNs to invest is extremely risky, and the Security Exchange Commission specifically warns individuals to beware becoming too active past 4:00. There are several reasons to be wary of extended hours. One is that the marketplace is rather empty, and it generally lacks liquidity. This means that there are comparatively few interested buyers and sellers and thus a potentially large spread between bid and ask prices. Furthermore, the fact that the after-hours market primarily contains large institutions can lead to a high amount of whipsaw, especially because general revaluations are largely replaced by reactions to recent news stories. It can be hard for one to find a fair price when the market moves rapidly in a specific direction.
Since the market players in this time period are usually professional traders, an amateur often finds himself at a demonstrated disadvantage. Many brokerage firms only allow ECN access to certain information, so can be difficult for a small-time investor to compare all of his options and truly evaluate the state of the market. Traders at mutual funds and other large institutions, on the other hand, have access to as much information as they want, making it hard for others to compete in the marketplace.
Other struggles in the extended hours market include dealing only with "limit orders" and the problem of computer delays. Investors find themselves dealing in the dark, a place few want to be when their savings are involved. After-hours trading is a good option to have in the Internet age, but it is a difficult one in which to be successful. Enough trading happens between 9:30 and 4:00 to satisfy the needs of most investors.