After hours stock trading

After hours stock trading used to only be available to large institutional traders and wealthy individual traders.

However, nowadays with the advancements in technology it is possible for most traders to trade stocks after hours.

How does after hours trading work?

To understand how after hours trading works, you need to have a basic understanding of how an Electronic Communications Network (ECN) works.

ECNs started to appear in the late 1990′s. They are a special trading system that displays and executes orders automatically without the need for a third party to be involved.

ECN trade execution is often faster and cheaper than trades handled through traditional markets.

Many ECNs have been approved to execute stocks, making them an attractive option for many stock traders.

To engage in the after-hours trading, you need have an account with a broker that either has it’s own ECN or access to at least one ECN.

Examples of brokers with an ECN include:

ECN Broker
Instinet

Is after hours trading suitable for me?

In most cases the answer to this question is no. Trading after hours has many additional risk factors including:

Lack of liquidity

After hours trading makes up a very small portion of the overall trading volume, it is around 1%.  As a result, trading spreads can be high, possibly extremely high. In some cases trades may not even get executed.

The significantly lower liquidity also makes the price of a stock much easier to manipulate by the big players, this can result in much greater fluctuations in stock prices than would typically be seen in normal trading hours.

Price Quotes

A major risk factor during out of hours trading, especially for the small trader, can be the lack of ability to get an accurate price quote.

Some brokers only allow you to see quotes from the one trading system they use for out of hours trading.

Ask your broker if their system will allow to access quotes from other systems.

It’s also important to be aware, that just because you have received a price quote from a different system, it doesn’t automatically mean you will be able to execute the trade. You will need to ask your broker if they will route your order to the other system. If you are restricted to the quotes within just one system, unfortunately you will not be able to complete the trade.

Potential for erratic price movements

The price movements during the after-hours session may not necessarily reflect the price movements during the day. They may also have no reflection on where the market opens the next trading day.

An uphill battle due to the competition

It is extra difficult for the smaller trader to compete with the large institutional investors out of hours because they will inevitable have far better access to live quotes and would be likely to have a much better chance at getting their order executed quickly.

Conclusion

In conclusion, after hours stock trading can be very risky, but there is the potential for greater reward due to the bigger price fluctuations.