The Perils and Profits of Extended Hours Trading

Extended hours stock trading is nothing new. The New York Stock Exchange (NYSE) and NASDAQ have been open to “after hours” trading since 1975—although only the so-called “high rollers,” the institutional investors and individuals with high net worth, could partake in block trading.

But today, there are plenty of opportunities to trade both early and late. Normal market hours are from 9:30 a.m. to 4:00 p.m. ET, but ECNs (electronic communications networks), generally trade between 8:00 and 8:00 ET Many traders relish trading during extended hours sessions because of the extreme volatility of some stocks.

This volatility generally springs from late-breaking stock news. For example, a drug company might announce that one of its trials was abandoned because it failed to win FDA approval. That’s huge news. And the stock will likely tank. Day traders will be over all that stock like a cocker spaniel in heat, anxious to short such a stock.

On the other hand, surprisingly high earnings, the dismissal of a law suit, and other good news may catapult the stock price in the other direction.

The Problems of Extended Hours Trading

There are problems inherent in extended hours trading.

For one thing, some online brokers will only display quotes from, and route orders to, a single ECN and that may shut you out from getting the best possible prices for your shares. For that matter, not all brokers even offer extended trading. Some make it available only during brief evening hours. And there’s nothing worse, I think, than holding a stock that’s cratering when your trading “competition,” the traders who use other brokers, are dumping their shares and you’re left holding the bag until tomorrow.

Reduced Liquidity

Second, there’s often a major issue with stock liquidity, the ability to quickly turn your stocks into cash. Since liquidity is dependent on the existence of both buyers and sellers, you might get caught in dead issue.

Widely-traded stocks like Sun Microsystems (SUNW) or Intel (INTC) will almost always offer a field to trade on. Perhaps not as vigorous as during the trading day but you can almost always get in or get out.

On the other hand, stocks that trade only 200,000 shares a day will likely dry up entirely. So will many of the thinly-traded NYSE stocks. In other words, executing a trade after hours might be difficult, perhaps impossible.

Part of the volatility of the after-hours market is due to the low liquidity inherent at this time of day. Many traders and investors have called it a day. The reduced liquidity will often make stocks move dramatically, and just as often, unrealistically.

Extreme Price Volatility

Then there’s the problem of volatility which I just mentioned. Stocks with low trading volumes and eager, after-hours buyers will likely be subject to wild and sometimes unrealistic price fluctuations. When companies report important news after the bell, such information can have a greater impact on stock prices in the after-hours marketplace. Companies have historically made important announcements following the close of regular trading to allow the investing public time to assimilate and reflect upon the information and to avoid huge swings during the daytime market.

Still, with all its unpredictability, extended hours trading can be a huge bonanza to the day- or swing-trader. It’s all in what turns you on.