After Hours Trading and its Risks
Stock Fraud and Misrepresentation Attorney Russell L. Forkey Representing Clients Throughout the State of Florida
Many investors have heard of after-hour trading, but what is and what are the attendant risks?
Over the years that I have been representing customers of brokerage firms, I have never represented someone that suffered any damages as a result of after-hours trading. Regardless, I have had clients ask questions about this type of trading activity. Therefore, I thought that I would provide a general comment on after-hours trading, including describing some of the risks associated therewith. Please keep in mind that this information is being provided for educational purposes only and is not to be considered legal or financial advice.
As the phrase implies, after-hours trading refers to stock trading outside the regular hours of major exchanges such as the New York Stock Exchange and the Nasdaq Stock Market. Regular trading hours, of these exchanges are 9:30 a.m. to 4:00 p.m. Eastern Time.
Trading outside these regular hours is not new. However, until the late 1990s, it was generally limited to high net-worth investors and institutional investors, such as mutual funds. The emergence of computerized trading systems, known as Electronic Communications Networks, or ECNs, allowed individual investors to begin participating in after-hours trading.
There are important differences between trading during regular hours and after-hours trading. During regular hours, trading occurs on multiple exchanges and consolidated price quotes reflect the best available prices at the moment across all the exchanges. In after-hours trading, price quotes are not consolidated and reflect the current price available through one or more ECNs. The types of securities available for after-hour trading, and the size and types of orders accepted, are more limited in after-hours trading than in regular trading hours.
While after-hours trading allows investors to react quickly to news, such as the release of corporate earnings reports after the market closes, the after-hours market typically is much more volatile and far less liquid than trading during regular hours, and therefore riskier.
As with trading during regular hours, the services offered by brokers during extended hours vary. You should therefore shop around to find the firm that best suits your trading needs.
Moreover, it is important that you consider the following risks if you are going to participate in after-hours trading:
Inability to See or Act Upon Quotes. Some firms only allow investors to view quotes from the one trading system the firm uses for after-hours trading. Check with your broker to see whether your firm's system will permit you to access other quotes on other ECNs. But remember that just because you can get quotes on another ECN does not necessary mean you will be able to trade based on those quotes. You need to ask your firm if it will route your order for execution to the other ECN. If you are limited to the quotes within one system, you may not be able to complete a trade, even with a willing investor, at a different trading system.
Lack of Liquidity. Liquidity refers to your ability to convert stock into cash. That ability depends on the existence of buyers and sellers and how easy it is to complete a trade. During regular trading hours, buyers and sellers of most stocks can trade readily with one another. During after-hours, there may be less trading volume for some stocks, making it more difficult to execute some of your trades. Some stocks may not trade at all during extended hours.
Larger Quote Spreads. Less trading activity could also mean wider spreads between the bid and ask prices. As a result, you may find it more difficult to get your order executed or to get as favorable a price as you could have during regular market hours.
Price Volatility. For stocks with limited trading activity, you may find greater price fluctuations than you would have seen during regular trading hours. News stories announced after-hours may have greater impacts on stock prices.
Uncertain Prices. The prices of some stocks traded during the after-hours session may not reflect the prices of those stocks during regular hours, either at the end of the regular trading session or upon the opening of regular trading the next business day.
Bias Toward Limit Orders. Many electronic trading systems currently accept only limit orders, where you must enter a price at which you would like your order executed. A limit order ensures you will not pay more than the price you entered or sell for less. If the market moves away from your price, your order will not be executed. Check with your broker to see whether orders not executed during the after-hours trading session will be cancelled or whether they will be automatically entered when regular trading hours begin. Similarly, find out if an order you placed during regular hours will carry over to after-hours trading.
Competition with Professional Traders. Many of the after-hours traders are professionals with large institutions, such as mutual funds, who may have access to more information than individual investors.
Computer Delays. As with online trading, you may encounter during after-hours delays or failures in getting your order executed, including orders to cancel or change your trades. For some after-hours trades, your order will be routed from your brokerage firm to an electronic trading system. If a computer problem exists at your firm, this may prevent or delay your order from reaching the system. If you encounter significant delays, you should call your broker to determine the extent of the problem and what you can to get your order executed.
With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.