Most traders and investors are familiar with the famous opening and closing bells at the New York Stock Exchange, which are rung at the beginning and end of each trading day by special guests or parties. Notable bell ringers range from athletes like the New York Yankees' Joe DiMaggio to former South African President Nelson Mandela to companies undergoing large initial public offerings (“IPOs”).
While the opening and closing bells mark the end of normal trading hours, traders and investors can still make trades in what’s known as pre-market or after hours trading sessions. These sessions don’t have nearly as much liquidity as normal market hours, but they enable traders and investors to acquire or dispose of positions that they might be concerned about holding through the next day’s open [see also 25 Stocks Day Traders Love].
In this article, we’ll take a look at pre-market and after hours trading, what it means for traders and investors, and how they can get involved.
How It Works
Pre-market and after-hours trades are placed just like trades made during regular hours, with the only difference being limited information and liquidity (see Figure 1). While regular hours trading automatically involves multiple ECNs, pre-market and after-hours trades may only be placed on a single ECN since participation by ECNs and market makers in pre-market or after-hours trading is voluntary.
Different brokers have different rules governing their extended hours trading sessions and processes. For instance, some brokers only permit pre-market trades made one hour before open, while other brokers may allow pre-market trading as early as 4:00am Eastern Time. These differences, as well as ECN routing differences, can make a big difference in execution times and prices.
Pre-market and after-hours quotes are provided in much the same way as regular hours quotes, although the information can be a bit more difficult to find. Some exchanges, like the NASDAQ, provide free pre-market and after-hours quotes and charts on their website (see Figure 2). Traders and investors can also find the information in many popular brokerage platforms.
Be sure to also read What Is Day Trading
In general, pre-market quotes provide traders and investors with a leading indicator for regular hours trading. For example, pre-market quotes can provide a close estimate of a stock’s opening price and potential daily volume (see Figure 3). These metrics are particularly important in volatile stocks that announced after-hours news the day before, such as an after-market earnings announcement.
Traders and investors closely watch pre-market and after-hours trading in the major indexes like the Dow Jones Industrial Average. For example, the NASDAQ-100’s pre-market indicator calculates the last sale prices of the index’s securities during pre-market trading from 4:00am to 9:30am Eastern Time. The data might show how technology stocks are poised to open after overnight news is digested.
While traders and investors should keep an eye on these indicators, it’s also important to remember that the pre-market price doesn’t necessarily reflect the opening price or daily trading range in any way. In fact, individuals or institutions may engaged in pre-market trading in order to try and impact the opening price by setting expectations that can prove quite different than regular hours sentiment.
Risks to Consider
The U.S. Securities and Exchange Commission (“SEC”) outlines eight risks that are associated with trading in pre-market or after-hours sessions:
1. Inability to See or Act Upon Quotes. Some brokers only allow traders to view quotes from the ECN they are using, which means that quotes from other ECNs may not apply to them unless the orders are routed.
2. Lack of Liquidity. Stocks trade fewer shares during pre-market or after-hours sessions, which means that it may be difficult to execute some trades, particularly at desirable prices.
3. Larger Quote Spread. Fewer shares traded during pre-market or after-hours sessions means that the spreads between bid and ask prices is likely wider than during regular market hours.
4. Price Volatility. News announced pre-market or after-hours might have a greater impact on stock price given the limited trading activity, which means price fluctuations can vary greatly.
5. Uncertain Prices. Stock prices traded pre-market or after-hours might not reflect the prices of those stocks during regular hours, particularly during uncertain times following earnings or news announcements.
6. Bias Towards Limit Orders. Many ECNs only accept limit orders during pre-market or after-hours trading, which means it’s important to check and see if these remain in effect during regular hours.
7. Competition with Professional Traders. Many pre-market and after-hours traders are professionals with large institutions, such as mutual funds or hedge funds, who have access to more information.
8. Computer Delays. Online trading involves the potential for delays in showing market information or executing trades in pre-market, after-hours, and regular hours trading, which traders should always consider.
The Bottom Line
Pre-market and after-hours trading provides traders and investors with a means to buy and sell outside of regular market hours. While these types of orders can be convenient in many situations, traders and investors should consider the many risks involved, such as limited liquidity and lack of information. Traders and investors should also consult their brokers to understand exactly how the trades function.
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