Alliance Gives After-Hours Trading a Boost

Eight large electronic trading networks will announce an agreement today to link their after-hours systems, a development that could significantly spur the growth of extended trading and give individual investors better prices on their after-hours trades.

The agreement between the eight systems--including MarketXT, Island, Archipelago and Reuters Group’s Instinet--is being done in part to address one of the chief criticisms of after-hours trading, that the existence of competing trading venues “fragments” the market and prevents individuals from securing the most favorable prices on their stock trades.

Once the systems are integrated, investors will eventually be able to submit an order on one system but have it executed on another system if a more favorable price exists on the latter, officials said.

For example, imagine that an investor seeking to sell a stock on one system finds that the highest price offered by a buyer on that system is $50.

Under the current format, the seller would have to settle for $50, or hold on to the stock in hopes of getting a higher price when the regular markets open the next day.

However, under an integrated system, if someone on another network is offering to buy at a higher price, say, $51, the trade could be executed on that system, thus garnering a better price for the seller.

“The real goal here is to protect the individual investor,” said Jack Vensel, Island’s vice president of sales. “Nobody wants fragmentation to scare away investors or to have an investor get an inferior execution because of fragmentation.”

An integration between the systems also addresses another complaint: that the relatively small number of orders on each network would produce volatile price swings in after-hours trading. Combining the “liquidity” of the systems reduces the chances for price fluctuations, experts say.

Though the electronic networks are competitors, they believe that a broadly cohesive after-hours market will draw more investors to after-hours trading in general and, specifically, more orders to their individual systems.

“By coming together with a commitment to solve these potential problems, we can help provide investors with a better market to invest in,” said Michael Satow, MarketXT president.

Electronic trading systems have emerged in the last year to challenge the dominance of the Nasdaq Stock Market, and to a lesser extent, the New York Stock Exchange. The trading systems make money by charging fees for executing orders and have sought to drain business from the established markets.

After-hours trading has started slowly with very light volume. Nevertheless, the systems have quickly moved to expand their hours of operation, believing that investors will slowly feel more comfortable in late trading. For example, the brokerage run by Datek Online Holdings Corp., which owns Island, operates from 5 a.m. to 5 p.m. Pacific time.

The other four networks integrating their systems are BRUT, Bloomberg Tradebook, REDIbook and Strike Technologies. With the exception of MarketXT, the other seven systems are “electronic communications networks,” a technical designation bestowed by the Securities and Exchange Commission.

Many questions remain about how the integration would work. It’s unclear, for example, exactly how investors would be able to assess the last price at which a stock traded after hours. That information is vital because investors base their buy and sell orders on a stock’s most recent price.

There is speculation that a unified “ticker tape” would be created to list the latest stock prices.