Technology enables investors to trade after normal market hours. But is this a good thing?
Technology has opened up the world of after-hours trading previously reserved for institutional investors. Your clients may be asking about it because they think it's more convenient. What they may not realize is that it's riskier due to low volume, increased volatility and wider spreads.
Professors Michael Barclay and Terrence Hendershott of the University of Rochester William E. Simon School of Business in Rochester, N.Y., studied after-hours trading from January 1999 to June 1999 and confirmed its negative attributes.
"The after-hours market is a lot thinner," Barclay says. "There's less trading. Prices are less transparent. The bid-ask spreads are wider. You get better execution if you trade when lots of others are trading."
Indeed, brokers have some well-founded concerns about extended-hours trading for clients. Their first concern is about getting clients the best price. And the second issue is about not wanting to be at work 24 hours a day.
But the technology exists and clients want it, so firms are responding. Of the 59 brokerage firms reviewed by Gomez Advisors, 20% offer after-hours trading and 20% offer pre-hours trading, according to Shallin Patel, a research analyst for the e-commerce rating firm in Lincoln, Mass.
"Basically it's eye candy for the investor," Patel says. "It's reassuring to them that their firm is offering it. But it's very risky. There are big swings in price and not much volume."
Morgan Stanley Dean Witter launched extended-hours trading Aug. 25, 1999. The hours are 4:30 p.m. to 8 p.m. Eastern time (ET) Monday through Thursday.
"It was designed for online investors," says a MSDW spokesperson. "It provides access to widely held NYSE and Nasdaq stocks." Clients can trade online, through a wireless device, via a toll-free number or by using a 24-hour registered representative service.
Salomon Smith Barney initiated after-hours trading in September 1999. It now offers all OTC and NYSE stocks from 4:01 p.m. to 8 p.m. ET, Monday through Friday. Average volume is 125 trades per day, according to an SSB spokesperson.
First Union Securities introduced extended-hours trading in January 2000, offering it exclusively through brokers. "We did it that way on purpose," says George Jennison, head of Retail Equity Trading in Richmond, Va. "Given the illiquidity of the markets in extended sessions, we wanted a trading professional involved." First Union brokers explain the risks and the firm requires the client to sign a three-page disclosure document.
Extended trading hours at First Union are from 8 a.m. to 9:25 a.m. ET and 4:05 p.m. to 5 p.m. ET, Monday through Friday. "The reason we cut if off then is liquidity is dead then anyway," Jennison says. Although First Union has not been formally tracking extended-session trading, Jennison describes the volume as "exceptionally light."
PaineWebber started offering after-hours trading in the first quarter of this year. Hours are from 8 a.m. to 9 a.m. ET and 4:30 p.m. to 6:30 p.m. ET Monday through Thursday, and 8 a.m. to 9 a.m. ET Friday.
Clients can call a toll-free number or place an after-hours trade through their broker. Do brokers come in early and stay late? "It depends on the relationship between the broker and the client," a spokesperson says. "Overall, the usage of [after-hours trading] is very limited and tends to be news driven."
Prudential Securities is beta testing after-hours trading with a select group of clients, according to a spokesperson. The firm plans to introduce it in January 2001.