The Whys and Hows of After-Hours Trading
A year ago, it was virtually impossible for individual investors to trade stocks after regular market hours. Now, Wall Street retail brokerages and online services are trampling one another to offer the after-hours trading option to their customers.
Late last week, Internet giant America Online and investment banking firm Wit Capital said they will team up to offer after-hours trading beginning Nov. 1.
Already in the market is Datek Online Brokerage Services, which is offering free after-hours trading to its customers through August.
Another electronic network, Eclipse Trading, says it plans an after-hours system by the end of the summer.
And both the New York Stock Exchange and Nasdaq Stock Market have promised late trading sessions of their own, though start dates are yet to be determined.
How does after-hours trading work? And why would individual investors want to trade in such sessions rather than in regular market sessions?
Here are answers to some commonly asked questions about after-hours trading:
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Question: Why are so many companies interested in offering extended trading to small investors?
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Answer: The short answer is: Because they think there’ll be a market for it.
For years, only mutual funds and other big investors have been able to trade stocks after the regular markets closed at 1 p.m. Pacific time. Now advancing technology, coupled with encouragement from market regulators, has prompted several upstart firms to plan after-hours systems aimed at small investors.
Fearing they could lose business to up-and-coming rivals, the two major markets--the NYSE and Nasdaq--say they want to get into the game too.
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Q: How might after-hours trading help individuals?
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A: The prime benefit would be that investors who make up their mind to make a trade late in the day could potentially have that trade executed immediately--and know the price at which it was done--rather than wait until the market reopens the next morning.
Currently, a welter of small investors’ orders is sent in after regular trading ends. Those orders are then executed in a flurry the next morning. Discount brokerage leader Charles Schwab, for example, handles one-quarter of its total orders every day at the opening.
Some analysts have argued that market openings, particularly for Nasdaq stocks, are unruly and may result in inferior prices for investors.
Yet one reason often cited by individuals for wanting to trade in the late afternoon or evening--being able to react to late-breaking news alongside professional investors--isn’t addressed by most of the new after-hours trading systems.
For example, big investors use after-hours trading to react to corporate earnings reports, many of which are released minutes after the regular session closes.
But several of the proposed after-hours systems for individuals, including those of Wit Capital and Eclipse, will have a delay of two to three hours between the close of regular trading and the start of the later session. Big investors trading on such institution-dominated systems as Instinet, therefore, will be able to react before many small investors can.
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Q: How will the new trading systems work?
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A: Each will vary, but in general, the companies operating them will offer late-afternoon (Pacific time) sessions lasting for about three hours.
Investors won’t deal directly with the systems. Instead, their online brokerages must sign up with the system providers to channel investors’ orders to the systems.
For example, Discover Brokerage has signed on with Eclipse, so all of Discover’s after-hours orders will be routed to Eclipse.
In all cases, customers will only be able to place “limit’ orders--that is, orders specifying the prices at which they’re willing to trade. Thus, for a trade to occur, investors who want to buy at a specific price must be matched by investors who want to sell at that price.
Just as during regular trading, investors would get immediate confirmation when a trade is executed.
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Q: What are the potential negatives of after-hours trading?
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A: There are several. Late sessions are expected to have far less “liquidity.” That means there will be far fewer investors in the market than during regular trading, making it harder for people to find others willing to trade with them at desired prices.
The reduced liquidity could make stock prices more volatile after-hours and make it tougher for investors to pick prices that will result in executed trades.
In addition, the proliferation of competing trading networks threatens to “fragment” the market and prevent investors from getting the best possible prices on their trades. If, for example, an investor on one after-hours trading system wants to buy XYZ stock at $100, and someone on a rival system wants to sell at that price, the two would not be able to meet to complete a trade.
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Q: Datek is already offering after-hours trading. How does it work?
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A: Datek began late last month letting its customers trade Nasdaq stocks until 2:15 p.m. Pacific time, one hour and 15 minutes past the close of the regular session. During August, use of the system is free. After that, Datek’s normal $9.99-per-trade commission will be charged.
Unlike other online firms, which must route orders through a third party, Datek owns Island, a popular electronic communications network, or ECN, to which it can send limit orders. To trade there investors can submit after-hours orders via Datek’s Web site.
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Q: What kind of business is Datek’s system doing?
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A: Datek says it processes an average of 400 small-investor orders per day in extended trading. Depending on the stock and its activity, there is a 1-in-3 to 1-in-5 chance of finding a counter-party and completing a trade, said Robert Bethge, Datek marketing chief.
About 41,000 of Datek’s roughly 250,000 customers have signed up for the ability to trade after hours, and 2,000 more do so each day, Bethge said. There is no minimum share requirement to trade.
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Q: Do any other online brokers now offer after-hours trading?
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A: A few do, but customers usually have to phone their orders into brokers. Muriel Siebert Financial, for example, says customers can call a broker to request that their orders be put through the Instinet ECN. The commission charge is 5 cents a share, with a $50 minimum.
Charles Schwab also lets investors phone in orders immediately after the market closes for potential late execution through select trading venues, but it doesn’t promote the idea.
Several other brokers, such as Ameritrade, don’t now let customers trade after the close. However, if it proves popular, it’s likely that many more brokerages will offer the service.
Times staff writer Walter Hamilton discusses the day’s market action regularly on the KFWB (AM 980)-Los Angeles Times Noon Business Hour. He can be reached at walter.hamilton@latimes.com.
