What Is Extended Trading?
Extended trading is trading conducted by electronic networks either before or after the regular trading hours of the listing exchange. Such trading tends to be limited in volume compared to regular trading hours when the exchange is open. Pre-market trading in the United States, in terms of stocks, usually runs between 4:00 a.m. and 9:30 a.m. Eastern Time and after-hours trading typically runs from 4:00 p.m. to 8:00 p.m. Eastern Time (EST). The U.S. stock exchanges are open from 9:30 a.m. to 4:00 p.m. EST.
- Extended trading is the trading that occurs on electronic marketplaces, outside of the official trading hours of the exchange.
- Extended trading hours vary based on which asset or security is being traded. Stock exchanges in the U.S. are open from 9:30 a.m. to 4:00 p.m. EST. Extended trading occurs outside those hours.
- Lower volume in extended hours can lead to increased risk and volatility, although this can also present opportunities for the astute trader.
Understanding Extended Trading
Electronic Communication Networks (ECNs) have democratized extended hours trading and even retail investors have an opportunity to place trades outside of regular exchange hours. Extended trading lets investors act quickly on news and events that occur when the exchange is closed.
Most brokers require traders to enter limit day orders during extended trading sessions since the lack of liquidity makes market orders risky. In addition, most brokers only permit extended trading on Reg NMS securities. Over-the-counter securities, many types of funds, some options, and other markets may be off-limits during extended trading hours.
Extended Trading Hours
The majority of extended trades tend to occur right around regular trading hours. This is because most news that affects investors occurs either shortly before or shortly after the exchanges open or close.
Investors in the United States can generally start trading at 4:00 a.m., but the majority of extended trading occurs between 8:00 a.m. and 9:30 a.m. EST. Similarly, investors may trade until 8:00 p.m. after the stock exchanges close, but the majority of extended trading occurs before 6:30 p.m.
If there is a major news event that occurs before the exchange opens, or after the exchange closes, there can be significant extended trading volume. Although, on most days volume is lower in the extended hours when compared to the volume during the hours the exchange is open.
Some stocks and exchange traded funds (ETFs) do significant volume in the pre- and post-market (extended hours), while other stocks do very little or none.
Extended Trading Risks
The U.S. Securities and Exchange Commission (SEC) highlights several risks associated with extended trading, including:
- Limited Liquidity: Extended hours have less trading volume than regular hours, which could make it difficult to execute trades. Some stocks may not trade at all during extended hours.
- Large Spreads: Less trading volume often translates to wider bid-ask spreads, which can adversely affect the market price for execution, making it harder to execute orders at favorable prices.
- Increased Volatility: Less trading volume often creates an environment for greater volatility given the wider bid-ask spreads. Prices can move drastically in a short amount of time.
- Uncertain Prices: The price of a stock trading outside of regular hours may not closely match the price during regular hours.
- Professional Competition: Many extended trading participants are large institutional investors, such as mutual funds, that have access to more resources.
Extended Trading Opportunities
All the risk of extended-hours trading can also be opportunities if a participant is able to get on the right of the action. For example, a stock may have closed at $57, yet placing a bid to buy at $56 or $55 may get triggered in extended trading since there are fewer bids out and if someone wants to sell they may sell to $56 or $55 even though the price was $57 only minutes ago. The stock may even fill orders at $54 and $60, for example, before opening the next day around $57 again.
The ability to trade during extended hours also gives investors and traders the opportunity to react instantly to the news which comes out when the exchange is closed. If a company reports poor earnings, the stock will likely start to drop and the trader can exit their position sooner, rather than having to wait for the exchange to open. By the time the exchange opens a lot more selling could have taken place, and the price could be much lower.
Example of Extended Trading in the Stock Market
The following chart shows the extended trading session on Twitter Inc. (TWTR) on a typical day with no major company announcements.
The stock closes for trading on the exchange at 4:00 pm. Prior to 4:00, the one-minute chart is active, with price movement every minute of the trading day. There is also volume associated with each one of those one-minute price bars.
After 4:00, the volume drops off dramatically. Some of the price bars also appear as dots, because there was a transaction at only one price level during that one-minute period. There are gaps between the dots (and some price bars) because the price may change even though transactions haven't taken place. This is because there are fewer bids and offers, and so as the bids and offers change, that may entice or scare someone into transacting at the new bid or offer.
The last transaction of the evening occurs at 7:55 p.m., in this example. The first transaction, in this example, occurs at 7:28 a.m the following morning. The price is trading higher than the prior close price, but is quickly adjusted as the price falls more than $0.75 in minutes. The price oscillates some more, on low volume, before the official exchange open occurs and volume escalates.