Wall Street’s closing bell is a fairly symbolic daily event. It’s the ceremonial ritual that indicates another day of Wall Street activity is coming to a close. The bell rings. The confetti flies. It’s the end of another trading day.
Or is it?
The answer to that question is actually no.
First, let me provide a little background. While the stock exchanges on Wall Street have long operated their traditional trading day from 9:30AM to 4:00PM Eastern Time, trading outside of these hours through electronic communications networks (known as ECNs) has been around since the 1970s. Since that time, the after hours trading platform has largely been available strictly to institutions and high net worth investors.
In the late 1990s, individual investors began clamoring for the same access to the after hours markets that the big money investors had. Thanks to the emergence of the ECNs across a wider scale, that access had finally become available and investors of all sizes started showing up.
So how do you go about getting in on the action? First off, it should be noted that the after hours markets don’t operate in quite the same manner as the normal trading day. Let’s look at some of the differences.
Normal Hours: The trade type could be a market, limit, stop, or stop limit order.
After Hours: The trade type is typically only a limit order.
The after hours markets function a little differently than the normal markets in that a trade will be executed only if a buyer and seller can be matched. To accomplish that, the after hours market usually requires that limit orders be placed – those where a maximum acceptable buying price or minimum acceptable selling price is set. Traders whose ranges match can then be paired up to execute a trade.
This is in contrast to the normal market where such trading restrictions don’t exist and traders are plentiful.
Normal Hours: Many traders of all types exist.
After Hours: A relatively small number of traders exist.
The sheer number of traders that exist in the market today is staggering. It has helped make the markets of today as efficient as they’ve ever been. Trades are executed swiftly and inexpensively.
In the after hours market, that efficiency doesn’t exist. Traders are relatively scarce and it’s possible that a trading partner for what you want to buy or sell doesn’t exist. If it does, the cost to execute the trade could be disconcerting.
Normal Hours: Greater liquidity exists.
After Hours: Lesser liquidity exists.
With the large number of traders available during the day, it’s quite easy to buy and sell almost any security there is.
The lower liquidity that is available in the after hours market could affect how quickly your trade is executed, at what price your trade gets completed and whether or not it gets executed at all.
Normal Hours: Market movements are efficient.
After Hours: Market movements could be more violent.
With a relative dearth of investors in the after hours markets, share prices could be bid up or down significantly as demand outpaces supply or vice versa.
History has shown that price changes that occur in the after hours market often don’t carry over to the normal market. Once traditional trading hours begin, investors could find themselves facing steep losses as share prices return to more efficient levels.
So what do you do now if you’ve decided that you want to trade in the after hours markets?
Check with your broker. If you have an online trading account with a firm like Vanguard, Fidelity, or E-Trade, check out their trading policies and hours. Most have after hours trading available from the time the market closes at 4PM Eastern Time up until as late as 8PM Eastern Time.
But be aware of the risks. Novice investors might be best advised to stay away from the after hours markets until they better understand the nuances of how it works. Even the most experienced of Wall Street traders have taken considerable losses when trading in an inefficient environment.
Once learned though, using the after hours market to trade can be a great additional tool in your arsenal to manage your portfolio.