What Is After Hours Stock Trading?

What goes on during the 'closed hours' on a stock market? How much after hours stock trading is really done and can you do it too?

The opening hours of every stock exchange are fixed and have been set as they are for years (for some markets, decades). In days gone by, the stock broker took the role of making a market for retail investors to trade in. They still do this, but more and more buying and selling happens electronically with less involvement of brokers.

As more trading occurs electronically, the idea of a market with a fixed location has become outdated. This has been pushed forward by the 'high frequency traders' that use algorithms to make their trades and provide liquidity.

Additionally, the large financial institutions (investment banks, hedge fund etc) have become increasingly global in their locations and international in their staffing policies. This means that there are traders and algorithms with available funds looking for deals 24 hours per day.

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These changes have enabled deals to be done outside of the normal trading day. They are the preserve of market participants, rather than retail investors, meaning that they are large transactions by big market players.

Some of these trades (both during and outside of the official market hours) are made in what are known as 'dark pools'. These are outside of the official exchange between two market participants. The large funds like these trades for a number of reasons, one of the main ones being privacy. The regulators, however, are not keen on dark pools. Since the Wall Street crash and financial crisis of 2008 it has become increasingly clear that a lot of business is transacted outside of the limits of regulation.

Even such massive changes as global electronic transactions and extended hours have their limits.

The trading day begins a little earlier than it used to. The reality is that the majority of investment bankers and hedge fund managers are having a daily meeting to establish priorities and trades for the coming day and there are limits to just how early people can get in to work, no matter how committed they may be. Since many already arrive before 8am, the number of early trades executed by the financial community is limited. This is one reason why financial news channels and journalists talk about 'indications' in their morning shows.

However, it is a different story after the market has closed.

After hours stock trading is much more common, partly because all traders are at their desks as the market closes, and partly because some savvy companies choose to release statements and news to the markets just before closing to limit any problems that the news may cause. For private investors, this works, but not so much for the fund managers and traders.

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The potential to trade after hours is almost never offered to the public. The amounts being traded - when it happens - are just too large for retail investors to take part in.

It is worth pointing out that although the amounts being traded are large, the reality is that most markets are much less liquid after closing. This means that there is less competition to quote prices and as such, the prices may be less competitive. In other words, the potential upside of deals after the closing bell can be limited due to the more technical factors of availability and price. This in turn increases the risk in the transaction. For hedge fund managers or vultures looking to conduct deals that the market cannot see (so that their competition cannot copy them or alter prices) these risks are probably acceptable, but for the private investor (no matter how large and sophisticated) this ought to be a time to avoid trading.

For the gambler that simply must trade no matter what (we hope that is not you!) the major spread betting firms offer prices on market opening and initial direction but for the most part this kind of trade is based purely around luck and the serious and responsible amongst us ought to avoid these 'opportunities'.

Another place

In addition to trading outside of the opening hours, there are now more and more electronic exchanges opening up. There are believed to be more than 40 in New Jersey...

Why New Jersey? Partly because it is physically close to Wall Street and the NYSE to enable fast trading but (as your author understands it) in a different state provides slightly different legislation.

These other exchanges make it possible for trades to be made "off" in a less regulated way. These locations are known as dark pools because the capital congregates away from the light of regulation. This enables more trading stock holdings between funds and algorithms and cutting out stock brokers and their fees in the middle. And by creating a new location, the market hours become more flexible enabling stock trading after hours if desired.

Needless to say, these dark pools are not accessible by a normal stock trader or investor like you and I. They are used by the mega funds that manage billions and their computer models. It could easily be argued that this provides (what is perhaps) an unfair advantage over the rest of the stock exchange (you and I).

To read more about related topics, please follow these links:

Are There Really Any Stock Exchange Secrets?

Are Corporate Executives Privvy To Stock Exchange Secrets?

Are Merchant Banks Trading Using Stock Exchange Secrets?

Are Some Stock Exchange Secrets Available To Everyone?

Stock Exchange Information And Research

What Is Insider Trading?

Stock Market Corruption - Just How Common Is It?

What Do Central Banks Do? Do They Influence Stock Markets?

What Is High Frequency Trading?

Is The Stock Market For Kids?