What is After Hours Trading?

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Contributor, Benzinga
July 31, 2023

One of the curious oddities in our modern society is the regular trading session hours of the stock market. Most trading activity on the stock market occurs from 9:30 a.m. to 4 p.m. EST. This makes active participation in the equities sector cumbersome for those who live near the west coast, where the regular trading session shuts down right after the lunch break.

However, with after-hours trading, all investors have the option of taking their game into overtime. Naturally, this opens many opportunities, but you should also be aware of the risks.

How Does After Hours Stock Trading Work?

As the name implies, after-hours trading is an extended session that occurs beyond the confines of normal trading hours. In some cases, trading on particular securities can last until 8 p.m. EST. This extra time affords participants the ability to trade shares on major developments that happen outside the regular schedule.

Moreover, after-hours trading may also broadly refer to premarket sessions, which are trades that happen before the opening bell at 9:30 a.m. Advanced traders may use this time if they’re wagering on US-listed international stocks, where breaking news could materialize at “unusual” hours.

After Hours Trading Schedules

For many years, investors of all stripes could only participate during normal session hours. Since 1985, those hours were the familiar 9:30 a.m. to 4 p.m., Monday through Friday, for both the NYSE and Nasdaq. However, in June 1991, the NYSE opened extended trading for institutional investors, where they could trade until 5:15 p.m. EST.

Primarily, the motivation for opening the trading floor was to respond to global demand. During this period, the concept of a globalized economy began. Additionally, international equities markets in London and Tokyo offered more hours of trading, making them attractive for well-heeled investors.

Each exchange has slightly different rules regarding their non-regular hours, which you can find below.

NYSE

Premarket trading hours: 7 a.m. to 9:30 a.m. EST

NYSE American, NYSE Chicago, NYSE National

  • Premarket trading hours: 7 a.m. to 9:30 a.m. EST
  • Extended-session trading hours: 4 p.m. to 8 p.m. EST

NYSE Arca

  • Premarket trading hours: 4 a.m. to 9:30 a.m. EST
  • Extended-session trading hours: 4 p.m. to 8 p.m. EST

Nasdaq

  • Premarket trading hours: 4 a.m. to 9:30 a.m. EST
  • Extended-session trading hours: 4 p.m. to 8 p.m. EST

Observed Holidays

Below is a list of holidays that equity exchanges observe.

  • New Year’s Day
  • Martin Luther King, Jr. Day
  • Washington’s Birthday
  • Good Friday
  • Memorial Day
  • Independence Day
  • Labor Day
  • Thanksgiving Day
  • Christmas Day

Finally, please note that Black Friday and Christmas Eve feature shortened hours, from 9:30 a.m. to 1 p.m. EST.

Who is Eligible to Trade After Hours?

When the NYSE initially launched after-hours trading, only institutional investors — organizations that invest on behalf of others, such as mutual funds and insurance companies — enjoyed this expanded opportunity. However, the rise of technology has evened the playing field, so much so that regular retail investors can now participate in these extended sessions.

The mechanism that makes after-hours trading possible is the electronic communication network or ECN. To provide quick background information, regular sessions feature market makers that act as intermediaries between buyers and sellers. In contrast, ECNs get rid of the intermediary altogether, allowing buyers and sellers to trade directly with each other.

While this sounds more efficient, everything has its advantages and disadvantages. Mainly, retail investors who take their first steps in the extended sessions quickly find out why market makers are so important to proper and orderly trading.

Also, while anyone is technically eligible to trade after hours, each ECN has its own set of rules. As well, brokerages that offer extended session access have their own guidelines and restrictions. Therefore, trading after dark isn’t as easy as it might sound. You really must perform your due diligence.

Finally, you might consider following this adage: Just because you can doesn’t mean you should. Benzinga covered an interesting case involving social media firm Twitter (NYSE: TWTR) in an article entitled, “The After-Hours Twitter Trades That Preceded Friday’s Plunge.”

In short, the trades that you see on ECNs can be differing from the activity during regular sessions. So yes, you can make money exploiting strange dynamics — but unless you are well-versed in trading protocols, you are more likely to be taken advantage of.

Pros and Cons of After Hours Trading

Understandably, the concept of after-hours trading is incredibly attractive. While everyone else has packed up their bags and left for home, you can burn the midnight oil, perhaps trading shares on news items that became public knowledge following the closing bell.

At the same time, you’re now competing with professional traders and institutional investors. Chances are, these are parties that know more than you and have far more resources. In other words, you should enter this arena with the humility that you may be competing at a disadvantage.

Pros

  • Headline trading: The most obvious advantage of after-hours trading is the ability to trade on breaking news, disclosures and other developments that occur outside regular session hours. For instance, American publicly-traded companies are headquartered across the country, meaning that their earnings disclosures could occur when the closing bell has already rung. International companies trade in other time zones, presenting challenges if you’re limited to only regular hours. Also, government agencies release important data such as the monthly jobs report during premarket sessions.
  • Schedule adjuster: As mentioned earlier, regular sessions are convenient largely for Americans who live in the eastern side of the country. For those who live near the west coast — or as far out as Hawaii — these hours are inconvenient as they coincide mostly with morning hours. After-hours trading allows these geographically disadvantaged traders to have more time on the clock.
  • Scoring a deal: Extended sessions occur exclusively via ECNs, and each one has its own set of rules. This means it’s possible you can score a great deal on a trade because asset pricing after hours is not consistent across the board.

Cons

  • Wild pricing: One of the risk factors that Benzinga mentioned in its article, “The Risks of PreMarket and After-Hours Trading, Part 1,” is the wild pricing during extended sessions. During regular hours, market makers provide liquidity for actively traded stocks, which in turn narrows the bid-ask spread. The more liquidity, the narrower the spread. But extended trading has no market makers, making it relatively illiquid and therefore broadening the spread. Combined with disparate ECNs running concurrently, you will likely see very wild pricing dynamics.
  • Crazy volatility: Not only is the pricing of assets wild, how quickly they change within a unit of time is a risky hallmark of after-hours trading. According to the Financial Industry Regulatory Authority, “…your order may only be partially executed, or not at all, or you may receive an inferior price when engaging in extended-hours trading than you would during regular trading hours.”
  • New kid on the block: Ever had the experience of transferring to a new school in the middle of the academic year and having to introduce yourself to everyone? That’s what you will feel when you engage in the extended sessions. Except for this time, the pain is not to your social standing but to your wallet as very few average Joe retail investors trade after hours. Instead, you are competing with professionals.

Factors That Affect After Hours Trading

Trading after hours follows its own rhythm. Further, certain catalysts often impose a more significant impact on your portfolio than during normal hours.

Volume

Due to the elimination of the liquidity-providing intermediary (market maker), extended sessions usually feature very low volume compared to regular session levels. In part, this means that the bid-ask spread is incredibly wide, forcing you to watch your trades carefully.

Spark

A spark refers to an event that inspires extended-session trading, typically a breaking news report or a financial or economic disclosure.

Participation

Most traders call it a day when the regular session is over, so you’ll find little participation.

Costs

Extended trading can cost you mainly through the wide bid-ask spreads. The wider the spread, the more “energy” it takes bidders (buyers) to break even at the asking price.

Best Brokers for After-Hour Trading

Due to growing interest and demand from retail investors, some major brokerage firms now allow anyone to take their shot during extended sessions. Below is a list of names to consider.

Today's Online Stock Movers

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Loser

Session: May 16, 2024 4:00PM EDT - May 17, 2024 3:59PM EDT

A Trading Strategy for Market Participants

Due to the complexities of the modern world, access to after-hours trading has never been more important. Not only does this provide greater engagement potential for Americans, but it also helps attract international investors to participate in our equity and commodity markets. At the same time, people who trade after hours must know what they are doing. Thus, beyond the many nuances and potential pitfalls, mostly professionals consider the extended session home.

Frequently Asked Questions

Q

What happens if I trade after hours?

A

The same benefits and consequences that apply during regular trading hours also apply to the extended sessions. In other words, after-hours trading is just like regular trading, but with rules, limitations and additional risks you must take into account.

Q

Is it considered a day trade if you sell after hours?

A

To clarify, if you bought stock on Monday morning and you sold later that day during extended trading, this qualifies as a day trade. However, the mere act of selling after hours does not automatically denote day trading.

Q

Why does stock price spike after hours?

A

During after-hours trading, there is a decrease in market activity for any stock being traded. This can result in increased price volatility and decreased liquidity, which can elevate risk.

About Joshua Enomoto

His distinct writing style of distilling convoluted data into relatable and compelling narratives has earned him recognition among several investment-related publications.