Once upon a time, stocks could only be traded during the standard Wall Street hours of 9:30 a.m. to 4 p.m. But over recent years, the Nasdaq expanded its pre-market operations, thus enabling investors to begin trading at 4 a.m. Eastern time. And as Nasdaq’s pre-market incrementally grew over time, investors across different time zones enjoyed the ability to trade stocks with greater convenience than ever before. Furthermore, during pre-market hours, investors can swiftly react to news items like corporate earnings reports and government economic data announcements. Simply put: during pre-market trading, share prices are strongly influenced by political events and other external factors, rather than supply and demand forces.
- The Nasdaq and other major stock exchanges have steadily augmented their trading hours to provide investors with more time to buy and sell securities.
- Nasdaq's pre-market operations let investors start trading at 4 a.m. Eastern time.
- Electronic communication networks (ECNs) enable investors to trade stocks during aftermarket hours between 4:00 p.m. to 8:00 p.m.
- Expanded trading hours let investors instantly react to corporate news and political events.
- Drawbacks to pre-market trading include higher transaction fees, depressed liquidity, and pricing uncertainties.
The first iterative step occurred in 1999 when Nasdaq opened for business at 7 a.m. Then in March 2013, it shifted its start time back another three hours, in an effort to compete with the New York Stock Exchange, which introduced a pre-market start time of 4 a.m., back in 2005. And thanks to electronic communication networks (ECNs), which match potential buyers and sellers without using a traditional stock exchange, investors can trade stocks during the aftermarket hours between 4:00 p.m. to 8:00 p.m.
Pre-Market Trading Drawbacks
Pre-market trading can negatively affect prices and volume. This is mainly because there are fewer stock market participants during pre-market hours, which depresses the liquidity of most listed securities. And with low liquidity comes greater volatility. Spreads between bid and ask prices expand, often swinging widely within a single trading day. As another drawback, it can be difficult to get accurate quotes, because even the best ECNs can register reporting delays.
In pre-market trading hours, individual investors often run at a disadvantage to their institutional investor counterparts, because of differences in buying power. Let’s assume that the California State Teachers’ Retirement System seeks to purchase a giant block of stock before 9:30 a.m. Let’s further assume that the Oklahoma Public Employees Retirement System happens to have such a stock block to sell. Under these circumstances, a small solo investor’s bid or ask price is likely to be politely ignored. Of course, even if that small investor’s trade went through, the pre-market transaction fee would likely be significantly higher than fees charged for the same trade during regular market hours.
Nasdaq’s pre-market is officially known as "extended-hours trading."
How Brokers Limit Pre-Market Trading
The institutions that codify the Wall Street rules know individual investors may face certain struggles during pre-market hours. Consequently, online brokerages often restrict investors’ ability to fully exploit these trading windows. For example, while Charles Schwab Corp. (SCHW) lets traders place orders around the clock, it doesn’t attempt to execute trades until 8 a.m., just 90 minutes before the opening bell.
Also, during pre-market hours, brokerage houses only facilitate limit orders, where securities are bought and sold at specific, pre-declared prices. Contrarily, investors looking to place a market order, where an issue sells at the going market price, may only do so during standard hours. In addition, the number of shares per order is usually restricted, as illustrated by the fact that Schwab won’t let investors trade more than 25,000 shares.
The Bottom Line
Individual investors should weigh the pros and cons of pre-market trading. Although there can be overwhelming risks, there are also potential windfalls for those with the intestinal fortitude to take the plunge.