What Is Extended Trading?
Extended trading is conducted by electronic networks either before or after the regular trading hours of the listing exchange. The U.S. stock exchanges are open from 9:30 a.m. to 4:00 p.m. EST.
Pre-market stock trading in the United States commonly runs between 4:00 a.m. and 9:30 a.m. EST and after-hours trading occurs from 4:00 p.m. to 8:00 p.m. EST.
Key Takeaways
- Extended trading occurs on electronic marketplaces outside of the official trading hours of the exchange.
- U.S. exchanges open at 9:30 a.m. and close at 4:00 p.m. EST. Extended trading occurs outside those hours.
- Most brokers require traders to enter limit orders during extended trading sessions.
Understanding Extended Trading
Electronic Communication Networks (ECNs) have democratized extended hours for trading outside of regular exchange hours. An ECN is a computerized system that automatically matches buy and sell orders for securities in the market. Extended trading allows investors to act quickly on news and events when the exchange is closed, and these transactions can hint at the open market direction.
Extended trades commonly occur around the beginning or end of regular trading hours. The majority of extended trading happens between 8:00 a.m. and 9:30 a.m. EST. Similarly, investors may trade until 8:00 p.m., but most extended trading occurs before 6:30 p.m.
Most brokers require traders to enter limit orders during extended trading sessions. Some brokers only permit extended trading on Reg NMS securities. Over-the-counter securities, many types of funds, some options, and other markets may not be allowed during extended trading hours. Brokerage firms commonly determine the rules that apply during extended trading. Rules governing the various markets and venues that conduct extended trading vary and may differ significantly from policies during regular trading hours.
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 that adversely affect the market price for execution, making it harder to execute orders at favorable prices.
- Increased Volatility: Less trading volume often creates greater volatility with wider bid-ask spreads. Prices can move drastically in a short amount of time.
- Uncertain Prices: The price of a stock outside of regular hours may not closely match the price during normal trading hours.
- Professional Competition: Many extended trading participants are large institutional investors, such as mutual funds, with access to more resources.
Example of Extended Trading in the Stock Market
The following chart shows the extended trading session for ABC Company on a typical day with no company announcements.
The stock closes for trading on the exchange at 4:00 p.m. Before 4:00 p.m., 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 p.m., the volume drops off. Some price bars appear as dots because there was a transaction at only one price level during that one minute. There are gaps between the dots because the price may change even though transactions haven’t taken place. Fewer bids and offers may entice or scare an investor 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 is posted at 7:28 a.m. the following morning. The price trades higher than the prior close price but is quickly adjusted as the price falls more than $0.75 in minutes. The price oscillates on the low volume before the official exchange opening occurs and volume escalates.
When Can Investors Benefit from Extended Trading?
The ability to trade during extended hours can allow investors and traders to react instantly to the news which comes out when the exchange is closed. If a company reports poor earnings, the stock will likely drop, and the trader can exit their position sooner rather than wait for the exchange to open.
Where Can Investors Trade During Extended Trading Hours?
Extended trading may take place on alternative trading systems operated by broker-dealers, exchanges, and other trading centers. However, all markets are not available for extended hours of trading.
What Is an Unlinked Market and the Risk During Extended Trading?
Extended hours trading systems are not linked, and the price of a stock displayed on one trading system may not reflect the price of the same stock displayed on another trading system.
The Bottom Line
Extended trading on the exchanges occurs on electronic marketplaces outside of the official trading hours. Stock exchanges in the U.S. trade from 9:30 a.m. to 4:00 p.m. EST and extended trading occurs outside these hours. Risks for investors who trade during extended hours include price volatility and larger quote spreads. Most brokers require traders to enter limit orders during extended trading sessions.
Related Terms: Limit Orders, Electronic Communication Networks, Liquidity, Trading Volume, Broker-Dealers.
References
- U.S. Securities and Exchange Commission. “Investor Bulletin: After-Hours Trading”.
- TD. “Pre-market and After-hours Trading”.
