The Risks of Ignoring Extended-Hours Trading

The greatest risk and mistake an individual investor can make is ignoring the trading activity and news which occurs in the after-hours and pre-market. You can be sure that the professionals are all tuned in with few exceptions. In fact, the professionals prefer that individuals remain sidelined, preserving the greatest opportunities for themselves. As with any market, it’s critical to understand the rules governing participation before jumping in with both feet. Not to worry, believe it or not it’s far simpler to play here than during the regular session.

he immense political and financial clout that the established securities exchanges and markets have in this country for preserving the status quo is nearly unparalleled. Indeed, though the Congress directed the SEC to create a national market system in 1975, it wasn’t until late 1999 that retail traders were allowed equal access to pre-market and after-hours trading. For years, institutional investors and market professionals negotiated transactions among themselves in a very limited and exclusive version of the extended-hours market. Today’s version is participant driven, more consolidated, reasonably liquid, transparent and inherently more safe than regular session trading. Yes, that’s not a typo; extended-hours trading is in many ways less risky than regular session trading thanks to the regulators. 

Investor Overprotection: “Limit Orders” Only
 
Forget the long winded disclaimer on extended-hours trading your broker is required to provide you before you execute your first pre-market or after-hours trade. After reading this disclaimer (as if anyone ever does) you may thing you’re about to enter the Russian roulette of trading. It couldn’t be further from the truth. Thanks to our overzealous securities regulators, trading after the close and before the open for individual investors is safe enough for your average kindergarten class. 

From a protection standpoint, the differing participation rules relate mainly to order criteria. While both ‘Market’ and ‘Limit’ orders exist as common order types in regular session trading, ‘Market’ orders are not authorized in extended trading. In other words, it’s a limit order only environment overnight. While it may appear that the elimination of market orders during the extended-hours would be a great disadvantage, it’s quite the opposite. As seasoned traders know, market orders are typically used by unsophisticated retail investors, unnecessarily giving up significant price concessions to get small orders filled.

If you’re entering an order with the intent of getting filled in the extended-hours, the order must be identified as an “extended-hours” order. In other words, a limit order entered with “Good-Til-Cancelled” (GTC) expiration won’t be available for execution after the closing bell. Most online brokers offer “Day + Ext.” (or similar variations) which means the order is live and may be filled around the clock (after-hours, pre-market and regular session).

Ok, now it’s time to clear the air on this one. In my view this additional step and requirement requiring retail investors to indicate whether or not their order should be executed in extended-hours orders is totally unnecessary and absolutely ridiculous. Why an order to buy or sell a stock at specified price has to also has to carry with it an intra-day expiration makes no sense. Put another way, if I want to buy Google (GOOG) at $450 at 3:30 pm why wouldn’t I be just as happy getting GOOG an hour later at that same price. Overregulation at it’s worst. 

You may have noticed that I’ve repeatedly mentioned “retail investors” in describing order rules and requirements. While the limit order only rule applies to all participants, the order expiration requirement to stipulate “extended-hours” or “regular session” (or both) doesn’t exist for professionals. Their limit orders are good morning, noon and night. 

Don’t let the professionals get all the overnight profits. Stay informed around the clock and take advantage of the safe environment and frequent trading opportunities before the open and after the close.