What is Extended Trading?
Extended trading is trading conducted through electronic networks before or after the normal trading hours of the stock Exchange. These trades tend to be limited in volume compared to regular trading hours when the exchange is open.
Negotiation before marketing in the United States, in terms of inventory, usually runs between 4:00 a.m. and 9:30 a.m. Eastern Time and after hours trading generally operates from 4:00 p.m. to 8:00 p.m. Eastern Time (EST). US exchanges are open from 9:30 a.m. to 4:00 p.m. EST.
Key points to remember
- Extended trading is trading that takes place on electronic markets, outside the official trading hours of the exchange.
- Extended trading hours vary depending on the asset or security being traded. Exchanges in the United States are open from 9:30 a.m. to 4:00 p.m. EST. Extended trading takes place outside of these hours.
- Lower volume for extended hours can lead to increased risk and volatility, although it can also present opportunities for the astute trader.
Understanding Extended Trading
Electronic communication networks (ECN) have democratized extended trading hours and even retail investors have the option to trade outside of normal trading hours. Extended trading allows investors to act quickly on news and events that occur when the stock market is closed, making it an excellent indicator for predict the direction of the open market.
Also, most brokers only allow extended trading on Reg NMS securities. Over the counter securities, many types of funds, certain options and other markets may be prohibited during extended trading hours.
Extended Trading Hours
The majority of extended trades tend to occur right around regular trading hours. Indeed, most news that affects investors occurs shortly before or shortly after the stock exchanges open or close.
Investors in the United States can usually start trading at 4:00 a.m., but the majority of extended trading takes place between 8:00 a.m. and 9:30 a.m. EST. Similarly, investors can trade until 8:00 p.m. after the exchanges close, but the majority of extended trades take place before 6:30 p.m.
If there is a major news event occurring before the market opens or after the market closes, there may be significant extended trading volume. However, on most days, the volume is lower during extended hours compared to the volume during trading hours.
Certain actions and exchange traded funds (ETFs) do a lot of pre- and post-trade (extended hours) volume, while other stocks do very little or none at all.
Extensive business risks
United States Security and Exchange Commission (SEC) highlights several risks associated with long trading, including:
- Limit Liquidity: Extended hours have fewer exchanges volume than normal hours, which could make it difficult to execute transactions. Some stocks may not trade at all for extended hours.
- Big differences: Lower trading volume often results in wider bid-ask spreads, which can negatively affect the market price for execution, making it more difficult to execute orders at favorable prices.
- Increased volatility: Less trading volume often creates an environment for greater volatility given the bid-ask spreads. Prices can change significantly in a short time.
- Price uncertain: The price of a stock traded outside normal hours may not closely correspond to the price during normal hours.
- Professional competition: Many participants in extended trading are large institutional investors, such as mutual funds, who have access to more resources.
Extensive trading opportunities
All the risks of trading for extended hours can also be opportunities if a participant is able to get to the right of the action. For example, a stock may have closed at $57, but placing a buy bid at $56 or $55 may be triggered in extended trading because there are fewer bids and if someone wants to sell, it may sell for $56 or $55 even though the price was $57 just a few minutes ago. The stock can even fill orders at $54 and $60, for example, before opening the next day around $57 again.
The ability to trade for extended hours also gives investors and traders the ability to react instantly to news that comes out when the exchange is closed. If a company reports a bad earnings, the stock will likely start to fall and the trader will be able to exit their position sooner, rather than having to wait for the market to open. At the time of the opening of the exchange, many more sales could have taken place and the price could be much lower.
Stock Market Extended Trading Example
The following chart shows the extended trading session on Twitter Inc. (TWTR) on a typical day with no major company announcements.
The stock closes on the stock market at 4:00 p.m. Before 4:00 a.m., the one-minute chart is active, with price movement every minute of the trading day. There is also volume associated with each of these one-minute price bars.
After 4:00 a.m., the volume drops dramatically. Some of the price bars also appear as dots, as there was only one price level trade during that one-minute period. There are shortcomings between dots (and some price bars) as the price may change even if no trades have taken place. This is because there are fewer offers and offers, and so as the offers and offers change, it may entice or scare someone away from trading on the new offer or offer.
The last transaction of the evening takes place at 7:55 p.m., in this example. The first transaction, in this example, occurs at 7:28 the next morning. The price is trading higher than the previous one closing price but is quickly adjusted as the price drops over $0.75 within minutes. The price oscillates a little more, at low volume, before the official exchange takes place and the volume increases.
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