Pre-Market and After-Hours Trading

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Although the vast majority of stock trading in US and international markets takes place during “market hours,” trades can also be placed during “pre-market” and “after hours” sessions. During these extended sessions, far fewer traders, hedge funds, and other participants are available to make a market buying and selling stocks. This means that stocks can trade outside of the ranges one might normally expect, especially around market-moving events such as earnings announcements.

When are the pre-market and after-hours sessions?

US stock exchanges such as the New York Stock Exchange (NYSE) and NASDAQ are open from 9:30 am to 4:00 pm Eastern time (New York City) Monday through Friday, and only closed on certain listed holidays. NYSE and NASDAQ both offer pre-market trading from 4:00 am to 9:30 am (when the regular session opens) and after-hours trading from 4:00 pm to 8:00 pm.

Other exchanges such as the OTC Markets (often referred to as “the Pink Sheets”) where the smallest market capitalization stocks are traded are open from 9:30 am to 4:00 pm but, have extended hours from 6:00 am until 9:30 and then again from 4:00 pm to 5:00. Hours for international markets change from place-to-place and certain markets in other countries such as the Tokyo Stock Exchange actually feature a lunch break.

What is different about extended hours trading?

Extended hours trades take place in an electronic market in which individual orders to buy and sell have to be matched with individual participants choosing to buy or sell at the same quantity and price. During regular market hours, traders expect to be able to fill all but the largest orders without having to adjust their preferred price to buy or sell stock. This is referred to as market “liquidity.” In extended-hours trading when the largest investors, hedge funds, and mutual funds are not likely to be trading, the market makers and high-frequency trading funds are also less likely to participate. The illiquid nature of extended-hours trading means it can be harder to place trades and traders may have to adjust the price at which they offer to buy or sell stock in order to find someone to take the other side of their trade.

How to take advantage of opportunities in extended-hours trading

Large moves in stock prices in pre-market or after-hours trading are often caused by earnings announcements and similar significant corporate news, or margin calls and forced liquidations. Many publicly traded companies announce earnings results through press releases or hold conference calls either before the market opens or after hours. When that happens, traders in the extended hours sessions who bid the price of the company’s stock up or down often provide the first reaction to company news. (Interestingly, these up or down moves may not tell the whole story of the reaction. Imagine a hedge fund that was expecting a company to announce a large loss and instead, only a small loss appears, so the fund covers its short by bidding the share price up.) In many cases, these extended sessions reactions from a limited number of traders become just as much part of the news about the company as the earnings results themselves. These initial reactions don’t always predict moves in the share price during the following regular session because larger participants including mutual funds and larger hedge funds are often unable to participate in extended-hours trading.

Many hedge fund and retail margin calls and liquidations can take place after hours or in the premarket session, sometimes with extreme results. If a brokerage finds its client in default and the brokerage chooses to liquidate an account, that could mean there’s one large seller of stock at a time with few buyers and prices could be forced down rapidly (or in the case of covering a short position, one buyer and no sellers). This buying or selling by a brokerage could deepen the losses for a client whose account is being liquidated.

Conclusion

Extended hours trading can be a good way for investors who think they have an edge in trading events such as earnings announcements to try to take advantage of sharp moves. But low liquidity and other limitations can also provide traps for the unwary who may not be able to buy or sell when they expect, or who may see large changes revert to the mean in the following session.