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After Hours (AHT)and Pre-Market Trading: Is It Right for Average Retail Investors?

It’s 4 PM EST and the bell rings on the New York Stock Exchange marking the end of the trading day. As we watch CNBC, Bloomberg or Fox Business News we see the tickers till scrolling at the bottom of our TV screens! What’s up with that? The New York Stock Exchange and the Nasdaq Stock Market—the highest volume market centers in the U.S. today—have traditionally been open for business from 9:30 a.m. to 4:00 p.m. EST. Although trading outside that window—or “after-hours” trading or AHT—has occurred for some time, it used to be limited mostly to high net worth investors and institutional investors.

But that changed by the end of the last century. Some smaller exchanges now offer extended hours. And, with the rise of Electronic Communications Networks, or ECNs, everyday Blue Collar Investors can gain access to the after-hours markets.  Before you decide to trade after-hours, you need to educate yourself about the differences between regular and extended trading hours, especially the risks. While after-hours trading presents investing opportunities, there are also the following risks for those who want to participate:

Inability to See or Act Upon Quotes. Some firms only allow investors to view quotes from the one trading system the firm uses for after-hours trading. Check with your broker to see whether your firm’s system will permit you to access other quotes on other ECNs. But remember that just because you can get quotes on another ECN does not necessary mean you will be able to trade based on those quotes. You need to ask your firm if it will route your order for execution to the other ECN. If you are limited to the quotes within one system, you may not be able to complete a trade, even with a willing investor, at a different trading system.

Lack of Liquidity. Liquidity refers to your ability to convert stock into cash. That ability depends on the existence of buyers and sellers and how easy it is to complete a trade. During regular trading hours, buyers and sellers of most stocks can trade readily with one another. During after-hours, there may be less trading volume for some stocks, making it more difficult to execute some of your trades. Some stocks may not trade at all during extended hours.

Larger Quote Spreads. Less trading activity could also mean wider spreads between the bid and ask prices. As a result, you may find it more difficult to get your order executed or to get as favorable a price as you could have during regular market hours.

Price Volatility. For stocks with limited trading activity, you may find greater price fluctuations than you would have seen during regular trading hours. News stories announced after-hours may have greater impacts on stock prices.

Uncertain Prices. The prices of some stocks traded during the after-hours session may not reflect the prices of those stocks during regular hours, either at the end of the regular trading session or upon the opening of regular trading the next business day.

Bias toward Limit Orders. Many electronic trading systems currently accept only limit orders, where you must enter a price at which you would like your order executed. A limit order ensures you will not pay more than the price you entered or sell for less. If the market moves away from your price, your order will not be executed. Check with your broker to see whether orders not executed during the after-hours trading session will be cancelled or whether they will be automatically entered when regular trading hours begin. Similarly, find out if an order you placed during regular hours will carry over to after-hours trading. In the chart below you can see a typical after-hours price quote and chart:

Know the risks of trading after hours

After-hours trading with the Qs

Competition with Professional Traders. Many of the after-hours traders are professionals with large institutions, such as mutual funds, who may have access to more information than individual investors.

Computer Delays. As with online trading, you may encounter during after-hours delays or failures in getting your order executed, including orders to cancel or change your trades. For some after-hours trades, your order will be routed from your brokerage firm to an electronic trading system. If a computer problem exists at your firm, this may prevent or delay your order from reaching the system. If you encounter significant delays, you should call your broker to determine the extent of the problem and what you can do to get your order executed.

How our trade orders are executed

Once we type our order to the online discount broker there are a series of events that take place terminating in the successful execution of the trade. Here’s how it works:

1- We place our trade order with our online discount broker.

2- The broker then utilizes an electronic routing system to send the order to a market maker like Citi, UBS and others.

3- The market maker pays our discount broker a fee for this market flow, about $0.01 or $0.10 for the 100 shares.

4- The actual shares can come from one of several sources:

  • Internalization– from the market makers own inventory
  • The major exchanges like the NYSE and Nasdaq
  • Dark Pools like Liquidnet- A dark pool (or dark pool of liquidity) is a private electronic transaction network, typically maintained by major  banks and securities companies, where stocks are bought and sold by clients of those companies. Because the matching of buyer and seller is     done entirely within the control of the bank, the bid, offer and sale prices are not published to exchanges (such as the NYSE). Dark pool      operators have the ability to route orders either to an exchange or to their own private network, depending on availability, pricing and client      preference. Ironically, before computers took over the floor of the NYSE, there was a popular saying relating to dark pools: The NYSE was the  biggest and most efficient dark pool the markets have ever seen or will see, i.e. when you gave your order to a broker it was essentially dark      because he wouldn’t just go into the crowd and announce “a million shares of BCI at the market”  because the market would move on him…he  kept a portion of the order details (i.e. size) in his back pocket and “worked” the order to get the best price or execution.  Real people on floor, not computers, are still significant players for executing large blocks and especially for setting the opening prices…the majority of NYSE order   flow comes at open and close because the prices are most accurate.
  • *Remain short the stock and look to buy it back at a lower price. This is where they make their money.

Market Makers Profit- The Math:

Let’s say the DMM (Designated Market Maker formerly known as “Specialists”) sells us a stock short @ $30.10 and buys it a few seconds later for $30.09 for a profit of $.01 per share or $1.00 for 100 shares. Since the DMM paid our online discount broker $0.10 for market flow and garnered $1 in profit, that’s a $0.90 profit for the transaction. It may seem like a mere bag of shells on first blush but do this millions of times per day and it becomes an extremely lucrative occupation.

There are some advantages: Having the ability to trade around the clock allows you to react quickly to breaking news stories or fresh information. Furthermore, although volatility is a risk associated with trading after hours, you may find some appealing prices during this time.

Pre-Market Stock Trading

As its name suggests, pre-market stock trading occurs before the stock market opens up for its regular hours of trading at 9:30 AM ET, Pre-market stock trading takes place between the hours of 8:00 to 9:30 AM, ET.

Investors like to trade in the pre-market session for the same reason they like to trade in the after-hours trading session…they want to get a leg up on the competition by reacting quickly to news announcements that occur when the regular market is closed. It has the same pros and cons.

Conclusion:

AHT and pre-market trading has developed to the point where all interested investors, big or small, have an opportunity to do business outside of standard hours. Just remember that while there are benefits to participating in AHT, you should also be mindful of the risks. Most retail investors are best suited for normal market hours trading in the eyes of this investor.

(Some of the above information was extracted from the Securities and Exchange website).

 

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Thanks for your amazing response for this new product.

Heading to Paris:

Linda and I will be leaving for Paris for a riverboat cruise and a rare non-seminar-related vacation. I will be keeping in touch via the internet on a daily basis. When I return (2nd week in October) I’ll catch up on the emails I didn’t have time to respond to while away. For a more immediate response contact Barry Bergman, the BCI Director of Research @:

barry@thebluecollarinvestor.com

My team will be shipping books and DVDs on our usual schedule and I’ve prepared blog articles in advance for publication at their normal times. Premium stock and ETF Reports will also be published on the normal schedules.

 

Next live seminar:

October 19th, Los Angeles, California:

http://www.aaii.com/chapters/meeting?mtg=2523&ChapterID=5

 

New seminar just added:

World Money Show: Orlando, Florida

January 29th – February 1st (details to follow)

 

Market tone:

This week’s economic reports were basically in line with analysts’ expectations and the situation in Syria seems to have calmed. Unfortunately, Congress is messing with us again and many are concerned about a government shut-down or a deleterious impact on the US credit rating. It appears that the art of negotiation is a skill many of our representatives never heard of. Much like an under-performing stock, perhaps it’s time to implement one of our exit strategies and move on to better-performers (trying to stay apolitical).  In any case, here are this week’s economic reports:

  • According to the Commerce Department, GDP in the second quarter rose by 2.5% on an annualized basis, slightly below the 2.6% predicted but well ahead of the first quarter’s pace of 1.1%. This had a lot to do with a rise in consumer and business spending and a rise in business inventories
  • Personal spending (a report of the income that households receive from all sources, such as wages and salaries, employer contributions to pension plans, rental properties, and dividends and interest. It also includes data on personal spending for durable goods (products with an expected life of more than one year) and nondurable goods and services, as well as information on the percentage of their income that households are saving. Since income is the major determinant of spending, the report is an indicator of future consumer spending patterns)  increased by 0.4% in August doubling July’s 0.2% rise
  • Durable-goods orders rose by 0.1% in August below the expectation of 0.2% but much better than July’s 8.1% decrease. Orders have risen in 4 of the last 5 months
  • The Conference Board’s index of consumer confidence fell to 79.7 in September but still much higher than January’s level of 58.4
  • New-home sales increased by 7.9% in August, following July’s 14.1% decline
  • The median sales price for homes in August came in at $254,600, up 0.5% from a year ago
  • Initial jobless claims for the week ending September 21st came in at 305,000, less than the 325,000 expected

For the week, the S&P 500 fell by 1.1%, for a year-to-date return of 21%, including dividends.

Summary:

IBD: Confirmed uptrend

BCI: Moderately bullish but taking a defensive posture and selling an equal number of in-the-money and out-of-the-money strikes until Congress makes its budget-related decisions.

It was great meeting several BCI members in Philadelphia (Bob, great putting a face to the name) and humbled to be speaking to another packed room.

My best to all,

Alan (alan@thebluecollarinvestor.com)

www.thebluecollarinvestor.com

 

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

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5 Responses to “After Hours (AHT)and Pre-Market Trading: Is It Right for Average Retail Investors?”

  1. Barry B September 28, 2013 1:59 pm #

    Premium Members,

    The Weekly Report for 09-27-13 has been uploaded to the Premium Member website and is available for download.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the BCI YouTube Channel link is:

    http://www.youtube.com/user/BlueCollarInvestor

    Best,

    Barry and The BCI Team

  2. Fred September 30, 2013 3:12 am #

    Alan, this is a topic I was hoping you would have on, as there are 2 questions I have for putting on trades.
    – First as I am from New Zealand, then how is it best for me to put on a trade, as market is closed during my day? (it just means that I would need to have my trades put on here before about 9am in morning(NZT).)
    – For the above I’m sort of thinking about the amount of time required for analysis,etc beforehand, and how long this should typically take?
    – Do you think I should really try to avoid the after hours times.(it just means that I would need to get up a bit earlier than usual)?
    – Also because from the questions above, if I had put on a trade and the shares price starts dropping, then is there a way I could have automatic trades put on(for buyback and reselling of options), maybe from an alert system? (as I said I am in New Zealand, and your trading hours are mostly when I am asleep in bed – don’t especially won’t to be woken!)?

    I guess it’s just a pity the markets aren’t open all 24hrs, because then it would make trading so much easier for all of us! Thanks

    • Barry B September 30, 2013 9:56 pm #

      Fred,

      A few thoughts…
      [1] You can’t trade options in the after market…so you need to trade covered calls during market hours.
      [2] If your timing prevents you being in the market during normal market hours, you can enter a limit “Buy-Write” order through your broker. Here you set up your trade as you would normally. Your analysis will be based on the previous day close (if there are no gaps over night, you should get close to your entry). The trade is then entered as a net debit.
      [3] After hours, trading, is the wild west…primarily for professionals. I would avoid after hours trading. I tried a few after hours trades and got burned.
      [4] As for the time you need to invest in your trading…there is no “best” answer. You need to understand what you are doing and research the trades that you are interested in. This means you need to understand the stock, the chart, your personal risk profile, etc. All of this varies with each individual. As your experience grows, it may take less time…but you need to put the time in. I realize that I didn’t answer your question, but the time really varies with each individual trader. A few hours at the minimum…after all, you are trading your hard earned money.
      [5] If your trade doesn’t perform as you expected, you can set up a conditional order. The types of conditional orders you can enter depends on your broker. The details are beyond the scope of this blog, but you would need to determine your downside target, set an alert, and buy back the call to remove the obligation as the first step. The rest of the conditional sequence depends on your broker.and the sophistication of the broker’s platform.

      Best,

      Barry

  3. Fred October 1, 2013 4:08 am #

    Thanks Barry for the good replies given above. I think a buy-write limit order sounds like a good option for me to try, because of my work hours sometimes meaning there isn’t a lot of time before to do study time for trades. If this type of order doesn’t get filled then I suppose I should just try again next day?(maybe with luck it goes through)
    I also do realise I will need a few hours for the analysis part pre-trade, its just for me a question of how much time I think I should allow myself before the markets close.
    Setting a downside target for an alert is one thing I had considered before, could this be our cost basis?, still a bit unsure here- maybe with practice I may know.
    Thanks for that advise.

  4. Barry B October 2, 2013 8:59 pm #

    Premium Members,

    The Weekly ETF Top-Performers Report has been uploaded to the premium member site. Since Alan is out of the country this week and has very limited internet access, we are publishing the report without charts but the report contains all other pertinent information.

    Best,

    Barry and The Blue Collar Investor Team

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