Since 1985, the normal trading hours for large exchanges in the U.S are considered to be the hours between 9.30am and 4pm, known as the “regular” trading hours. An after hours trading explanation relates to the buying and selling of assets outwith these times. Eastern Standard Time matches potential buyers and sellers using electronic communication networks as opposed to a stock exchange. An electronic communication network (ECN) is something that allows individual investors to contact one-another electronically as well as allowing large organizations that invest on behalf of their members to interact anonymously (known as institutional investors) – helpful if they would like to hide their actions. Institutional investors were the prime users of after-hours trading until the late 20th century; the point at which electronic communication networks became more common and accessible. After-hours trading is now possible for the majority of investors via brokerage accounts. It is sometimes referred to as the “after-hours market,” or “extended-hours trading.”
After-hours trading sessions: After-hours trading runs in sessions, usually between 8am and 9:15am EST for the morning session, and between 4pm and 8pm for the afternoon/evening session.
How does it work?
An electronic market (EM) is a service that is set up to match buy and sell orders. This means that if there are no orders for a stock that is on the EM, any trader that places an order to purchase that stock has to wait for a corresponding sell to arrive, before an order can be executed.
Trading outwith normal hours is not a brand new concept, however it did used to be exclusively high-net-worth investors as well as institutional investors that would partake.
There are a number of differences that one should be aware of before trading during extended hours sessions:
Standard: An investor can place an order at any time, but they will only be executed between 9:30am and 4:00pm (Eastern Standard Time)
After Hours: Investors can place orders between 8:05pm and 9:25am, with these orders having the possibility to be executed between 7am and 9:25am (Eastern Standard Time)
Standard: Trading normally takes place on exchanges and NASDAQ
After Hours: Trading take place through an electronic market
Standard: An assortment of different order types are accepted (limit, stop-limit, etc.)
After Hours: Only limit orders are accepted
Standard: Orders of all sizes are accepted
After Hours: After Hours trading sessions have a maximum order limit of 25,000 shares in one single order
Standard: Different time limits are available
After Hours: Any orders placed are only valid for the particular session during which they are placed.
Standard: Higher trading activity is present during regular trading hours, meaning greater liquidity and a higher likelihood of order execution
After Hours: The quieter trading activity during the after hours sessions can result in wider spreads and much greater price fluctuation.
Whilst After Hours/Extended Hours trading offers such as convenience, that there are a number of influential events/information releases outwith regular trading hours, and the possibility that prices could be more inviting during these sessions, investors must remember that considerable delays and the risk of orders not getting executed are present.