The pre-market is when trading activity such as buying and selling securities is happening before the regular time of the market. The pre-market session is usually taking place from 8:00 a.m. until 9:30 a.m. EST from Monday to Friday. At 9:30 a.m. EST, the market is opening regularly. The pre-market activity is usually a way to prepare you for the direction that will take place when the market opens.
Like after-hours trading, pre-market trading activity is also limited to volume and liquidity. This results in a larger spread on bid-ask prices. The most important thing to bear in mind is that the most activity and volume takes place during the regular hours of the stock market. Any activity before that is usually very little unless there is news such as a merger between to companies. For instance, yesterday Holicity (HOL) announced its merger with Astra space-launch company and the pre-market shows an increase in the stock price of 8%. However, this is nothing compared to the 57% increase before the market closed.
Moreover, Index based exchange-traded-funds (ETFs), such as the SPDR S&P 500 and SPY do show moving quotes due to the contracts traded in the S&P 500. Other stock might not have a moving quote and instead will show only a stub quote.
A stub quote is also known as a placeholder quote and is an order to buy and sell shares that is far lower or higher than the prevailing market price. Stub quotes are mostly used by market makers who wish to fulfill their liquidity obligations without executing the orders.
After-hours trading was introduced before the pre-market trading in 1991 in the New York Stock Exchange by extending trading to one hour. This move happened in order to increase competition with other exchanges such as the London Stock Exchange and Tokyo which offered more hours of trading. Over the years the exchanges became more computerized and New York Stock Exchange decided to extend the hours of trading. This how pre-market trading was introduced between 4:00 a.m. and 9:30 a.m.
The good thing about the pre-market ability to trade is the opportunity to jump on a stock that had news such as the example we mentioned above. By doing so you will get a lower stock price if the stock is going to go up when the market opens, or you can get a higher price if the stock is going to fall due to bad news when the market opens. Like after-hours trading, pre-market trading can only be executed with limited order through electronic communication networks (ECNs).
ECNs: Archipelago (ARCA), Insinet (ISLD) and Bloomberg Trade Book (BTRD).
Market makers are not allowed to execute any limit order before the opening bell at 9:30 a.m.
Since pre-market volume is very low, it can be risky due to the exceptional wide bid-ask spreads on stocks. Most brokers are available for pre-market trading at 8:00 a.m. EST. This is usually the time that the volume starts picking up around the broad. Stock opportunities can be proved to be tricky if, for example, there is a strong pre-market and can reverse as soon as the regular market opens.