What is after-hours trading?

Individual investors once could only buy and sell stocks during the regular business hours of major stock exchanges. In the US Markets regular business hours is typically defined as 9:30 AM - 4:00 PM.

Trading before and after regular exchange hours became available in the 1990s for major institutional players and high-net worth individuals.

The rise of online investing in the late 1990’s led to demand from a wider range of individual investors for “after-hours” trading.

What are ECNs?

The emergence in the late 1990’s of electronic trading venues known as "electronic communications networks" (ECNs) made it possible for more individual investors to trade after-hours. In theory, any investor who makes arrangements to access an electronic communications networks can trade in the after-hours marketplace.

To participate in the after-hours trading sessions, you must be a customer of a brokerage firm that either has an ECN of its own or access to one or more ECN's. ECNs include Island, Market XT, Archipelago and Instinet amongst others.

It is important to understand that some ECNs are regulated exchanges, others are sidelines of broker-dealers, and others are unregulated.

How does after-hours trading work?

This is where things start to get complicated:

• Electronic communication networks -- ECNs – do not operate during the same hours or even under the same rules as the traditional markets.
• Most ECNs are affiliated with online brokerage firms and have their own rules.
• Some ECNs accept only "limit orders"under which you specify a price at which you want to buy or sell.
• If the ECN can make a match with another investor, your trade is executed. If not, the trade may be posted to the ECN limit order book or if the ECN has links to other market centers (exchanges, market makers or other ECNs) and those centers are actively participating in the after-hours session, the order could be routed to that alternate market center for execution.
• Some ECNs now permit "market orders"under which you simply indicate that you want to buy or sell a stock. However, the risks (see "What are the risks of after-hours trading?") involved in after-hours trading make it a good idea to only use limit orders.
• One major difference between regular and after-hours trading is how much of the marketplace you can see when you place your order. Some ECNs limit (or even bar) your ability to see quotes on other networks and will only post your order to the ECN you are on.

This is why you need to know in advance how your brokerage firm’s after-hours trading offering works and how your trades will be handled.

Will my after-hours order carry over to regular market hours?

Not necessarily. Check with your brokerage firm to determine how it handles orders placed in the after-hours markets.

In some cases, your after-hours order may only be a live order during that specific after-hours session; in others, depending on your brokerage firm's protocol, an order could be live in the regular and after-hours trading sessions.

What are the risks of after-hours trading?

After-hours trading can be a risky environment that is ill suited to many investors.

Too a large extent the after-hours market place is a news driven market. In many instances there are fewer active participants to react to and digest the news being released from public companies and other sources.

With fewer investors participating in this marketplace, securities have less "liquidity," which, among other things, can mean larger spreads between bid and ask prices. Investors who are unfamiliar with the workings of limit orders find themselves handicapped in the ECN marketplace. Additionally, depending on your brokerage firm and how they have implemented their after-hours trading session, the market centers that your orders can interact with may not include all possible execution venues. As a result your order may not be executed at the most favorable price available amongst all the market participants. There is also exists the possibility that your order may not get executed at all.

Since large institutions often play a bigger role in moving stock prices up and down in the thinly traded ECN environment, investors can find themselves whipsawed by even more severe price volatility in the after-hours market than is the case during regular exchange hours.

In short, the after-hours trading market is no place for amateurs!

What about the costs of after-hours trading?

Most online brokerage firms charge the same price for regular and after-hours trading. (However, some firms impose a premium in all cases for limit orders, which are recommended for after-hours trading.) But there is more to after-hours trading costs than just commissions. After-hours stock prices may not always "track" with stock’s closing price during regular hours … or the stock’s price when the market reopens.

Lack of liquidity (an insufficient number of buyers and sellers that can make it harder to get the price you want for a stock), severe price swings and limited information about price quotes are among the additional factors that sometimes contribute to higher costs in after-hours trading.

Where can I get more information about after-hours trading?

Information about after-hours trading may be found at the U.S. Securities and Exchange Commission web site.

Technical information about the after-hours markets is available from the New York Stock Exchange.

Remember that after-hours trading arrangements vary widely from one online brokerage firm to the next. Before venturing into the after-hours market, thoroughly review all explanatory information from your online broker and other available sources.