Something of interest this Morning.
(COMTEX) B: After-hours markets sees savviest, stupidest trading
B: After-hours markets sees savviest, stupidest trading
When the business day draws to an end and American investors start wondering how
their stocks and mutual funds performed, some of the savviest _ and stupidest _
trading is just getting under way.
In the so-called after-hours markets, that is. After the New York Stock
Exchange, the American Stock Exchange and the Nasdaq Stock Market call it quits
at 4 p.m., the fun is just beginning over at nouveau trading forums such as
Instinet, Island and RediBook.
For the next three to four hours, the most die-hard investors can place buy and
sell orders to their hearts' delight. Many initiate their trades through online
firms such as ETrade, Datek Online and Onlinetrading.com, but even the
traditional brokerages _ Merrill Lynch, DLJDirect and Charles Schwab among
others _ are catering to the happy-hour set.
``We've clearly seen the demand from our customer base,' said Stephen Richards,
chief online trading officer for ETrade Group of Menlo Park, Calif.
The convenience of placing a trade after getting home, unwinding and watching
``Nightly Business Report' explains part of the appeal of evening trading.
Another draw is that people can react to corporate earnings announcements and
other news breaking after the traditional markets close.
That's been happening a lot in the first quarter of 2000, such as when IBM Corp.
announced its year-end earnings at 4:52 p.m. on Jan. 19. IBM shares closed the
regular trading day at $115.50, then jumped to $122 in after-hours trading
before settling at $119.50. The following day, IBM opened at $123 and closed at
$121.
In other words, the first investors to hear IBM's earnings report were able to
pounce on the stock at a discount to next-day prices.
But there's a big downside.
First off, after-hours markets aren't the same as the focal and orderly markets
of the business day. Instead, trading is done in what are known as electronic
trading networks, or ECNs, that have handled after-hours trading for
institutions for years. Each ECN, such as Instinet, MarketXT and Archipelago,
brings together investors from different sets of brokerages. RediBook, for
instance, is the after-hours trading forum for customers of Schwab, DLJDirect,
Fidelity and TD Waterhouse. ETrade customers convene in Instinet, a Reuters
Group unit and the graybeard of ECNs.
Once the regular markets close, trading takes off in different directions on the
ECNs. While a share of Microsoft has one bid price and one ask price on the
Nasdaq Stock Market, those prices vary from one ECN to the next. That wouldn't
be so bad if average investors could compare all those prices, but such a
centralized price-reporting system doesn't yet exist. Consequently, buyers can
be overpaying for stocks without even knowing it.
Then there are the problems within any particular ECN.
In a regular stock market, large numbers of traders generate volume, and volume
begets liquidity and narrow spreads between bid and ask prices. It's just the
opposite after the markets close.
A recent study by two professors at the University of Rochester's William E.
Simon School of Business found an average spread of 24 cents between the bid and
ask prices of the 250 most heavily traded Nasdaq and New York Stock Exchange
listings between Jan. 1 and June 30, 1999. In the after-market, the spread rose
to nearly 50 cents. In other words, if a stock price were unchanged, you could
lose 50 cents a share selling stock that you just bought.
Bid and ask prices are so far apart at night that buyers and sellers often never
come together on price to complete a trade.
``Market makers aren't out there making a market in a security _ you are,' said
Louis Corrigan, a partner with the San Francisco hedge fund Aesop Capital.
``Veteran traders know this, so they often try to game the trading in their
favor, putting out low-ball bids or ask simply to see if someone will bite. They
can also try to head-fake other investors into believing that a company's
earnings are better or worse than they might seem.'
Corrigan said his firm has made fewer than a dozen trades after hours _ and was
burned on all but one occasion. Brokerages themselves concede that things can
get a little weird after 4 p.m.
``In the evenings, because there aren't so many participants, there tends to be
lower volume, which may cause prices to overreact in the after hours,' said
Larry Leibowitz, chief executive of RediBook in Jersey City, N.J.
Investors _ or better, speculators _ in the shares of Iomega Corp. learned
recently how the after-hours markets can get ahead of themselves.
The computer peripherals maker waited for the stock market to close Jan. 20
before announcing fourth-quarter earnings a penny better than the analysts'
consensus. The stock, which had drifted below $5.50 all day long, suddenly
bolted above the $6 mark in after-hours trading. When less excitable investors
assumed the trading the next morning, Iomega shares fizzled and closed at $5.
That case sums up the feelings of Ed Tavlin, a vice president with the brokerage
firm Fahnestock & Co. in Hallandale. He has taken a ``Where's the beef?' stance
on after-hours trading.
``A stock might announce some news after the close and there will be some
trading on Instinet or Island, and the next day it opens, the price is not
necessarily related to what happened after hours,' Tavlin said.
Most brokerages that offer after-hours trading, including RediBook, guard their
customers against the predations of other traders by taking limit orders only.
Limit orders are orders at a certain price or better. For example, you can place
a limit order for 100 shares of XYZ Corp. at $50 a share. Only when XYZ's share
price drops down to $50 will the trade go through. Likewise, you can instruct
the brokerage not to sell a stock until it climbs to a certain price.
Brokerage firms and ECNs say volume is increasing and that ECNs are working on
an agreement to share trading information after hours. Meantime, buyers and
sellers are becoming more realistic about their bid and ask prices.
Richards, of ETrade, said his company aims to offer stock trading around the
clock in one to two years. Although many investors trade after hours in response
to late-breaking news, he said the trading patterns of ETrade customers reveal a
more basic explanation for the surge in after-hours activity.
``It's a continuation of our investors trading from the daylight session,'
Richards said.
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