Why does after-hours trading (AHT) exist?

By Ryan C. Fuhrmann AAA
A:

The advent of the Internet and electronic information exchanges has opened financial market trading to millions of investors throughout the world. Back in 1999, just as the dot-com craze was reaching a fever pitch, major U.S. stock market exchanges started introducing extended and after-market trading hours. Surprisingly, it hasn’t proven as popular as anticipated, but does still exist and could yet take off.

Theoretically, investors should be able to trade amongst each other at any hour of the day. Already, many electronic communication networks (ECN) and market exchanges outside of traditional exchanges (New York Stock Exchange, Nasdaq), let institutions place order interest and trading activity outside of regular trading hours. However, liquidity and the timely display of stock trading data outside of regular hours still remains an issue. 

After-hour trading still exists because major market participants are free to exchange trading information whenever they wish and they are motivated to continue to encourage price discovery at any hour and across the globe. Large institutions and other investors will always continue to negotiate large share blocks at any hour of the day and across time zones. For these reasons, after-hours trading will likely continue to develop and improve.

One academic study estimated that information asymmetry, or the difference between informed and uninformed investors, is the greatest prior to when the stock market opens. From this perspective, information does take time to be disseminated and work its way through the market. For an information edge, certain investors may seek to trade outside of regular market hours to attempt to profit from this asymmetry. 

The Bottom Line

After hours trading is more risky, but following vital data can make trading outside of regular trading a profitable endeavor for investors. It hasn’t developed as expected, but continues to improve over time.

At the time of writing Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

 

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