The After-Hours Trading Club

In a multimedia lab deep in the heart of Hoboken, N.J., computer scientist Patricia Morreale is inventing your next stock exchange.

It is a 24-hour, seven-day-a-week market without borders, time or government: a place where trades are made at the best possible price, on the basis of the best possible knowledge, at the speed of light, without the hands of middlemen to slow them down.

An investor might fire up an “itinerant agent,” a sophisticated smidgen of software code, and cast it out on the Internet to peer at all exchanges and private networks everywhere in the world to find the best price; it would then execute the trade on its own and report back.

A couple of years ago, Morreale’s work at the advanced telecommunications department of Stevens Institute of Technology might have seemed like science fiction. Now it’s already technically feasible. But no one knows when--or whether--it will be available. However, steps in its direction are being taken as new ways to buy and sell stocks become available.

For example, trading volume after the major U.S. exchanges are closed and on private networks is growing. The major exchanges themselves have “after-hours” sessions, although these are limited in scope.

For the most part, however, private trading options have been for institutions or wealthy traders.

But deep-discount brokerage Jack White & Co. in San Diego is opening a window on this after-hours trading world for brave investors willing to take the risks that come with it. The firm provides access to the most common way savvy professionals trade stocks after hours--on Instinet, a private network owned by Reuters Holdings, the giant media company.

Unlike traditional stock exchanges where designated traders match buy and sell orders, and unlike the Nasdaq market, where brokerage market-makers still largely control “bid” and “asked” prices, the Instinet is essentially an electronic swap meet of bids and asks between investors that subscribe to the service.

The owner of a security in Boston, for instance, might type in the price at which he’s willing to sell 5,000 shares of Caterpillar. If a money manager in Hong Kong wants to buy, she just hits that bid--and the deal is consummated. No middleman. No spread to pay--although access to the private network costs thousands of dollars every month.

Says Harindra de Silva, managing director of Analytic TSA Global Asset Management in Los Angeles: “It’s like boys swapping trading cards, a direct person-to-person barter. “

The problem with this arrangement, even for pros, is that although something like 100 million shares a day are now being cleared through Instinet, users of the system after regular U.S. exchange hours are relatively scarce. Most American traders go home. That lack of what experts call “depth” makes trading after hours, even on good information, rather dangerous: With relatively few bids and offers being made, it’s hard to know what the price of a security should be.

As an example, a lot of major money managers who wanted to unload stock in high-flying network equipment manufacturer Cascade Communications after a sour 4 p.m. analyst conference call three weeks ago flew to their Instinet terminals only to find a scant number of buyers for their shares. Those who did decide to unload shares did so at a 40% discount to the day’s close, thinking themselves smartly ahead of what was expected to be a rout the next day. But they were later chagrined to discover that they had sold below the next day’s opening price, according to one trader.

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Still, Neil Goldsmith, publisher of BusinessTech (https://businesstech.com, $99/year), a Web-based magazine that’s a cross between the Harvard Business Review and Wired, calls Instinet “a peek at the way the stock trading is moving--into a fully leveraged, deconstructed electronic activity that requires no white-shoe brokers at Goldman Sachs charging exorbitant rates.”

Companies like Instinet, he says, are like “little hot-blooded mammals eating dinosaur eggs--they’re stealing the future from old-fashioned trading firms.”

Want to give it a try? Jack White & Co. (https://pawws.com/Jwcphtml) recently began offering after-hours Instinet trades, as well as its own brand of stock swaps, for rather minimal fees: A regular trade at White is $33 plus 3 cents a share, and an Instinet trade is only two pennies dearer.

For a more exotic brand of person-to-person trading, White offers a service called InterConnect, in which prospective buyers and sellers of shares meet electronically eight times a day, with prices struck between the bid and ask.

“This is where markets are going,” says Jack K. White, chief executive of the firm, who acknowledges that the volume in this system so far is low. “Institutional investors have been doing this for about four years, and there’s usually a five-year lag between them and the public.”

Yet even these systems are only a bridge, says Morreale, to a time when clever itinerant computerized agents, also called “distributed” agents, will independently prowl the World Wide Web for traders day and night seeking a good deal based on a set of investment criteria.

Morreale, whose research is largely underwritten by Bell Atlantic and AlliedSignal, said she could have an operation employing such agents up and running in 90 days. But even if such a marketplace was as liquid as today’s markets and as secure, she believes she would be impeded by the major investment houses. “If trading is available everywhere at all times without a broker, then why would you need Wall Street?” she says. “This is very scary to them. Suddenly money will be moving much faster than even they, or governments, can track.”

Of course, many traders don’t need agents: They stay up trading practically all day and night themselves. Hedge fund manager James Cramer of Cramer, Berkowitz & Co. in New York said he regularly uses the Instinet after hours to close out trades made during the day. A few minutes before we talked at 4:30 p.m., he said he had sold 5,000 shares of Microsoft at $98.75 on Instinet because he had bought them 2 points lower at 3 p.m. “I saw the bid and thought, what the heck, I’ll just take the gain.”

Likewise, the day before, he was at his desk at 5 a.m. when Reuters Holdings reported lower-than-expected earnings in Europe. He bought 12,500 shares on the London Stock Exchange, then sold it up two bucks by the time it opened 4 1/2 hours later in New York.

“I regard it to be business as usual,” says Cramer, who says his firm does more volume after hours than any other in the nation. “No one will trade anything large with you on Instinet--it’s all 5,800 shares or 6,200 or 10,000 at the most--but I do it to get the rhythm of the market. It puts me in the groove. It’s like saying Ted Williams had a good feel for hitting. After-hours trading helps me get a good feel for what’s going to happen during the day.”

So be careful out there after hours if you don’t have an agent. It’s dark, and the sharks like Cramer are circling.

* Street Strategies explores investment tactics. Jon D. Markman is a Times staff writer. He may use strategies described in the column. He can be reached at jon.markman@latimes.com