Sergio and Ed,
I had been considering PT Discount to take advantage of after hours activity on occasions. What has stopped me so far has been the concern of getting "stuck" on the euphoric rise on say, the earnings number, then the precipitous decline once the conference call is digested. You've prolly seen those instances they describe in the article.
Here's the Barron's article for those without a login there. Hope I am not violating any copyright issues!
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Aftershocks
Sometimes, trading when the market is closed produces more
pain than gain
Michael Santoli
hen the stock exchanges close and Nasdaq's screens dim each evening, an
after-hours trading party erupts. And with very few exceptions, the small investor
isn't invited. These days, more stocks than ever before are trading long into the
night, a trend propelled by the fast growth of off-exchange trading systems, a shift
toward late-afternoon news announcements and the prevalence of edgy portfolio
managers who are hair-trigger traders. Especially after big news like an acquisition
announcement or the disclosure of rotten earnings, stock prices on private
electronic trading systems often swing wildly from the official closings, giving
institutional traders a jump on the next day's action and a place in line ahead of
smaller investors.
Consider the fate of the poor individual shareholder of Employee Solutions, a
Phoenix temporary-staffing firm. On March 13, the stock fell from 19 7/8 to 15 3/8
during regular Nasdaq trading on rumors that fourth-quarter earnings would be a bit
light. After the close of trading, the company said it was postponing the release of
its results, spooking the market even more. The stock fell another 5 3/8, to 10,
after hours, as portfolio managers headed for the lifeboats. More damage was done
the next day before the market opened when the company warned that profits
would indeed fall short of expectations. In official trading that day - the only time a
retail investor could easily act on the sour news - the shares never changed hands
for more than 6 7/8; they closed at 6 1/4. Some of those shareholders are now
suing the company for allegedly misleading them about its health.
``There's an uneven playing field now in the brokerage business,'' declares Jack
White, president of the San Diego discount brokerage house Jack White & Co.
``It's a double standard between the institutions and the public,'' says White, who is
among the technology-oriented executives looking for ways to give individuals
access to off-hours trading.
The little guy's lack of such access has become more relevant recently because of a
trend toward post-market announcements by big companies, a development that
has been decried by advocates for individual investors. In one emblematic shift,
IBM last quarter reported its earnings after 4 p.m. Eastern time, ending a long
tradition of early-morning announcements. The reason was to better accommodate
the schedules of institutional investors and Wall Street analysts, whose ears IBM
most wants to reach.
But Mom and Pop should be careful about what they wish for. Because right now,
trading after hours is a bit like heading for a bookie in a bar after the window at the
track closes. The bet will get placed, but doing this can be expensive, and there are
the equivalent of tough characters with pool cues lurking around to exact
punishment on the naive.
Even the institutions that cruise Reuters' Instinet, the leading private
over-the-counter trading system, and other off-exchange forums after hours
frequently get sniped or guess wrong about how trading will go the next day.
One day in February, when 3Com said after the market's close that it had agreed
to buy U.S. Robotics for what was then the equivalent of 68 1/4, traders lit up the
screens with orders to buy Robotics, which shot as high as 71 1/2 in after-hours
trading, after closing on Nasdaq at 61. What the buyers didn't know was that, after
sleeping on it, the market would pan the deal and clip the shares of both companies
the following morning. U.S. Robotics got only as high as 65 the next day and
closed at 59 1/8 - delivering a stinging loss to anyone who had bought excitedly
after the previous day's close.
In a far less dramatic but more typical example, Motorola last Monday closed on
the New York Stock Exchange at 61 1/8 before reporting earnings that at first
blush seemed to beat forecasts. The stock jumped to 62 after hours. But Tuesday
morning, when analysis of the numbers revealed continuing margin shrinkage,
Motorola opened at 61 and fell from there. (For more on the stock, see page 13.)
The problem is that most investors are
absent when the markets close, leaving
mainly the market makers and opportunistic
money managers to field any buy or sell
offers. And when activity flares up in
response to a news event, all of the trading
interest tends to come from one side. This
lopsided and illiquid market causes prices to
overshoot the levels that truly reflect supply
and demand.
For after-hours trading to become a sensible
option for retail investors, ``you need
liquidity, which can take years to create,'''
says Doug Alexander, chief executive officer of Reality Online, a Reuters division
that designs stock-trading sites on the Internet for brokerage firms.
Comments Steve Wunsch, who runs the electronic market known as the Arizona
Stock Exchange: ``The off-hours phenomenon is often exaggerated as if there were
tremendous demand for trading when the markets are closed. There isn't.'' Rather,
he contends, alternative avenues such as executing trades directly with others on the
Internet have been created because smaller investors ``just can't get satisfactory
efficiency and cost during the market.'' What about casting the dice overnight after
some late-breaking news? ``There are few very isolated opportunities to do that,''
Wunsch claims.
Charles Schwab, the largest discount broker, offers sharply limited after-hours
opportunities. Clients can trade in the Big Board crossing session from 4:10 to 5
p.m. at stocks' closing prices, on Nasdaq's SelecNet before and after market hours
and on the Pacific Exchange from 4:00 to 4:50 p.m. But Schwab doesn't advertise
the service. In fact, the company cautions customers about the hazards of trading in
these after-hours arenas.
(For the NYSE crossing session, Schwab limits trading to round lots of 100-share
increments and won't accept limit orders. And if news is just out on a specific
company, the firm may curtail trading in its shares. SelectNet trades must be at least
100 shares in size and likewise can't include limit orders after hours. No such
restrictions apply to the Pacific Exchange session.)
V. Eric Roach, chairman of Lombard Brokerage, points out that if the gaps
between the bid and asked prices on many stocks are considered too wide at high
noon, ``spreads get really outrageous'' after hours on private systems. Nonetheless,
he says that his company's technology-proficient clients ``like the idea'' of having
access to after-hours markets, even if ``liking it and doing it are two different
things.''
That investors seem attracted to the idea has led a handful of companies to offer
ways for individuals to tap into off-hours systems.
Prominent among these firms is PT Discount Brokerage, a young Chicago-based
broker that sells individuals access to Instinet and SelectNet - through which
securities firms trade with each other - before and after market hours.
Stephan Schuetz, a managing director at PT Discount, says that, when the service
was launched, buying and selling stocks between the bid-ask spread was expected
to be its major attraction. Instead, there initially was more demand for trading
before and after market hours. Now, Schuetz adds, about 10% of the firm's trading
volume occurs when the markets are closed. The company directly broadcasts a
customer order of as little as 100 shares over Instinet or another system, giving it
the same exposure as institutional orders, which tend to be for at least 5,000
shares. The firm charges an extra 1/16, or 6.25 cents a share, for this service.
The customer ``almost becomes a trader'' under PT Discount's system, Schuetz
says. And that's exactly what many of his intense clients want to be; with the ranks
of day traders swelling during the heated bull market, many customers ``are almost
gamblers.'' And enough would-be high rollers have discovered PT Brokerage to
boost its client list to 10,000 from zero 16 months ago. The firm started with five
traders and now has 30. Other discounters also play gatekeeper to Instinet-like
systems, though some only on larger trades.
Jack White & Co. is building a system in which a computer program queues up
public orders eight times a day for discrete ``crossing sessions'' in which trades in a
given stock are executed at a single price. Eventually, an investor should be able to
sit at the Jack White Web site and watch the status of his or her order developing,
able to gauge the market's interest in buying or selling certain stocks.
In fact, such electronic crossing systems could very well be the future of
off-exchange trading, driven by the rise of the self-directed investor and the
quickening acceptance of computer transactions.
Ian Domowitz, a Northwestern University professor who studies alternative trading
methods, asserts that considering ``investors are already at the computer and used
to dealing with their discount broker through E-mail,'' going the next step to bypass
brokers altogether, at any hour, ``is a no-brainer.'' But only if the tremendous
uncertainties of ``critical mass and liquidity'' are overcome.
That won't happen easily, quickly or - ironically - without the direct participation of
institutional investors. Mutual and pension funds hold a growing chunk of all stocks,
making them the most likely sellers and buyers of individuals' shares. And despite
frequent reports of their possible demise, the big trading desks of Wall Street firms
are still called on to commit loads of capital to grease the market's wheels. This
ensures that these firms know where the likely buyers and sellers are.
``The key is to find pools of liquidity,'' says Joe Konen, president of high-tech
discount broker AmeriTrade in Omaha. ``That means some type of institutional
involvement.''
Until the retail market gains institutional-type liquidity, the after-hours game will
remain mainly one of mutual- and hedge-fund managers volleying stocks among
themselves. And, by some lights, that's not wholly bad for the individual. Instinet
Executive Vice President Richard Schenkman notes that, after all, ``Whom do our
institutional customers represent but a bunch of individual investors?''
If there comes a time when the outcry from individuals becomes loud enough to
suggest that a profitable unserved market exists, more brokers will respond by
servicing their orders, Schenkman adds. And - who knows? - exchanges might
even hear the commotion and lengthen their hours, as the NYSE did in 1985 by
moving its opening bell to 9:30 from 10 a.m.
Still, that's not likely to comfort the little IBM shareholder on April 23 if Big Blue
releases subpar earnings at 4:10 in the afternoon.
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I have seen some of the folks at #daytraders get burned on the afterhours trading. You certainly have to keep on top of things if you go this route!
L2 and Long and LP Mark |
