What is Extended Trading?
Extended trading is trading conducted by electronic networks either before or after the regular trading hours of the listing exchange. Such trading tends to be limited in volume compared to regular trading hours when the exchange is open.
Pre-market trading in the United States, in terms of stocks, usually runs between 4:00 a.m. and 9:30 a.m. Eastern Time and after-hours trading typically runs from 4:00 p.m. to 8:00 p.m. Eastern Time (EST). The U.S. stock exchanges are open from 9:30 a.m. to 4:00 p.m. EST.
introduction of Extended Trading Hours
The emergence of ECNs (Electronic Communication Networks) is helping expand access to extended hours trading, making it possible for retail investors to place trades outside of regular exchange hours. Extended trading allows investors to act quickly on news and events that occur when the exchange is closed, helping them predict the open market direction.
If a major event occurs before the exchange opens, or after the exchange closes, there can be significant extended trading volume. Although, on most days, the trading volume is lower in the extended hours than during the hours the exchange is open. However, some stocks and exchange-traded funds (ETFs) do significant volume in the extended hours.
The U.S. options and futures markets tend to follow different trading hours, depending on the underlying assets, while the forex market operates 24 hours per day.
Extended Trading Risks
The U.S. Securities and Exchange Commission (SEC) highlights several risks associated with extended trading, including:
- Limited Liquidity: Extended hours have less trading volume than regular hours, which could make it difficult to execute trades. Some stocks may not trade at all during extended hours.
- Large Spreads: Less trading volume often translates to wider bid-ask spreads, which can adversely affect the market price for execution, making it harder to execute orders at favorable prices.
- Increased Volatility: Less trading volume often creates an environment for greater volatility given the wider bid-ask spreads. Prices can move drastically in a short amount of time.
- Uncertain Prices: The price of a stock trading outside of regular hours may not closely match the price during regular hours.
- Professional Competition: Many extended trading participants are large institutional investors, such as mutual funds, that have access to more resources.
Extended Trading Opportunities
All the risk of extended-hours trading can also be opportunities if a participant is able to get on the right of the action. For example, a stock may have closed at $57, yet placing a bid to buy at $56 or $55 may get triggered in extended trading since there are fewer bids out and if someone wants to sell they may sell to $56 or $55 even though the price was $57 only minutes ago. The stock may even fill orders at $54 and $60, for example, before opening the next day around $57 again.
The ability to trade during extended hours also gives investors and traders the opportunity to react instantly to the news which comes out when the exchange is closed.
If a company reports poor earnings, the stock will likely start to drop and the trader can exit their position sooner, rather than having to wait for the exchange to open. By the time the exchange opens a lot more selling could have taken place, and the price could be much lower.