What is after hours trading?

After the major U.S stock exchanges such as Nasdaq and New York Stock Exchange, close trading becomes after-hours trading. The opening hours of the major exchanges in the U.S is from 9:30 a.m. to 4:00 p.m. Eastern Time. This being said, trading after 4:00 p.m. involves buying and selling securities when the market is closed. It  can last until 8:00 p.m. and is usually conducted through an electronic communication network (ECNs).

What is an electronic communication network (ECNs)?

An electronic communication network is an online system that automatically connects buy and sell orders. It is basically giving direct connect to brokerage and individual traders or retail investors to trade between themselves without the involvement of a middleman. Therefore, it eliminates the role of exchange market makers and over-the-counter market makers to execute the orders. This allows easier trading in different geographical locations and is also beneficial for investors that cannot be active during normal hours.

ECNs are obliged by the Securities and Exchange Commission (SEC) to register as a broker-dealer since it charges a fee for each transaction is being made. SEC classifies them as alternative trading systems. They avoid charging wide spreads like traditional brokerages do and provide low commission and fees. Furthermore, it can offer anonymity to investors that wish to not be named. Investors that make huge amounts of transactions can find ECN very attractive for this reason.

However, ECNs come with a huge price for those who wish to use one. Per-trade-based commissions can be very costly and cannot be avoided in any kind of way. This of course can have a direct impact on profits.

Who can trade after hours market?

It was used primarily by institutional investors until around 1999 ECNs became widely accessible to retail investors too. Extended hours trading is nowadays becoming very popular and brokers like Fidelity offer after-hours trading.

after hour trading

Why is after-hours trading unfair?

It can offer many great opportunities for gains however, it is inevitable to avoid inherent risks that arise from trading these hours.

Less liquidity: Open market hours are concentrated with more buyers and sellers compared to after-hours trading. This can make it difficult to sell shares on spot and convert them to cash.

Wide spreads: Lower liquidity means lower volume which often results in higher spreads between the bid and the asking price. This can cause many implications to a trader since it will require a bigger price movement to achieve the desired result.

Retail investors face tough competition: Retail investors who can and are trading after-hours face tight competition from large institutions who have access to more information and resources than the average investor. Besides institutions are backed with huge amounts of money and when they trade it’s completely different. If a retail investor enters a buy position with let’s say $100 and an institution enters sells its position on the same asset that Is worth thousands the stock will fall.

Volatility: The after-hours market has lower volatility than the regular hours and as we have learned in previous explanatory terms volatility is very important for traders.

Real-life example

There is no better real-life example than the one we are experiencing these days! GameStop (GME) and AMC stocks are jumping after for the first time in history retail investors team up to move the market. What is happening these days is just history. A Reddit group named wallstreetbets with more than 4 million users has decided to short squeeze the hedge funds and institutions that are heavily short on these stocks. GameStop went from $6 to $430 at the moment of writing this article and they are convinced to take it to $1000 if the ‘big boys’ do not give up their short positions.

The power of the after-hours trading is shown at this very moment. This fight between the big boys and retail investors is mostly winning during the after-hours trading. This is because Wall Street goes home after the market is closed and they stop fighting back (making the stock drop) while the rest of the investors are moving the stock up. So, retail investors (those who can-cause not everyone has access to after-hours trading) figured out this way to make the stock jump since there is no “fight back” from the other side. The power of the after-hours market, as I would like to call it! The most impressive thing about this is that they are winning and those famous reporters have sided with them while saying “the retail investors found a way to do back to them what they are doing for decades”. Even Elon Musk tweeted the group’s link.

Can after hours trading affect the opening price?

Whatever happens in the after-hours trading will of course be reflected in the opening price. As mentioned in the above real example, GME stock has closed on $230 on Wednesday and during the after-hours trading, it is now up to $430. If this price does not change before the market opens today, the opening price will be $430.

On the other hand, if a stock price closed on a $20 and during after-hours trading has fallen below $18 and is now $16.50 the opening price will be the exact same and will reflect the after-hours trading price of now.