WSJ: "Grasso Says After-Hours Trade Can Cause Volatily in Market"
June 2, 2000
Heard on the Street
Grasso Says After-Hours Trade
Can Cause Volatily in Market
By SUSAN PULLIAM
Staff Reporter of THE WALL STREET JOURNAL
Here's a message to investors itching to bet on stocks after market hours: Don't.
That, at least, is the word from Richard Grasso, chairman of the New York Stock Exchange. In an unusually blunt letter to Arthur Levitt, chairman of the Securities and Exchange Commission, Mr. Grasso blasted some volatile price moves in several big stocks he cites, alleging that they could be distorting the market.
Sure, Mr. Grasso has plenty of incentive to oppose after-hours trading. His exchange is locked in a high-stakes battle to retain its prominence; trading that takes place after the 4 p.m. Big Board close erodes the exchange's franchise. Indeed, each of the trades cited by Mr. Grasso in his letter was executed off the exchange by members of the National Association of Securities Dealers (which operates the rival Nasdaq Stock Market), most likely on screen-based trade-matching systems known as electronic communication networks, or ECNs.
Still, his missive is sure to heat up the debate over how safe after-hours trading is for individual investors. At the least, he offers the latest evidence showing how some of the nation's largest stocks can get shoved around after hours on very low volume. This comes as the nation's stock exchanges try to defend their turf as alternative trading methods increasingly make it possible to trade at times and in places once not possible.
Volatility in after-hours trading isn't a new development, of course. What is new is that more investors than ever are being tempted to trade outside the traditional exchange hours. Some investors are drawn to after-hours trading for convenience and the ability to trade if news breaks late. Trading volume after hours peaked in March at 58 million shares, up from 47 million shares in October 1999, though it slumped to 42 million shares in May. By contrast, 1.03 billion shares trade on an average day on the NYSE. (After-hours volume tends to mirror the broader markets; the May drop-off was likely a reflection of the overall markets slump.)
The number of big movers in big stocks after hours lately has been large. On May 22, 10 stocks each gained 10% or more in after-hours trading, with only one trading more than 10,000 shares. That has become fairly routine: On Wednesday, 11 stocks each rose more than 10% on light volume; five of those moved on volume of less than 1,000 shares.
This is all the more reason to be concerned, according to Mr. Grasso. If investors can't rely on smooth pricing, they will be convinced "the tape cannot be trusted," he contends. "Our best tool for insuring transparency in our markets is being destroyed."
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Rocking After Hours
Some large stocks that had big moves after exchange hours on trades of just 100 shares
Stock Date 4 p.m.
Close After-hours
Trade NYSE Open
Next Day
Wal-Mart Feb. 24 $44.38 $46.00 $44.31
Disney Feb. 25 32.31 31.00 32.31
IBM Feb. 25 105.63 108.00 105.56
GE March 9 131.38 129.00 130.88
Source: New York Stock Exchange
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Take Wal-Mart, which on Feb. 24 was pushed up 8% on volume of just 400 shares in the 2 1/2 hours before the closing of the consolidated tape at 6:30 p.m. Though trading continues throughout the night on various exchanges, trading between 4 p.m. and 6:30 p.m. is important because the last trade during that period is what is recorded by some vendors of stock-market data as the closing price. (The Wall Street Journal uses the 4 p.m. price.)
In the case of Wal-Mart, the stock stood at $44.375 at 4 p.m. in NYSE trading. Then it rose to $46 on a 100-share order at 6:10 p.m. Another trade pushed the stock up another $1 on 200 shares to $47. The last trade, for 100 shares, was at $47.875, up $3.50 from 4 p.m.
The next day, Wal-Mart opened at $44.3125, down just 6.25 cents from 4 p.m. the day before but down $3.5625 from the last trade in after-hours trading.
Because stock-market indexes such as the Dow Jones industrial average and the Standard & Poor's 500 are based on the 4 p.m. figure, they aren't affected by after-hours trading activity.
So, what does it all mean for Internet investors? Don't burn the midnight oil trading stocks. "Whoever bought those WMT shares paid almost $1,000 more in the aggregate than if they had purchased either on the NYSE close or at the opening the next day," Mr. Grasso writes. Even more startling, Mr. Grasso notes: "The market capitalization of Wal-Mart was inflated by $15.5 billion by these after-hours trades, and deflated by almost the same amount at the opening the next day."
Since Mr. Grasso's April 6 letter, the SEC says it has been urging stock-market-data vendors and publishers to distinguish between after-hours closing prices and regular-hours trading. "We believe this is a temporary problem that will be alleviated as market-information publishers make appropriate distinctions between regular and after-hours prices," an SEC spokesman says.
In the case of General Electric, it took just one trade -- of a puny 100 shares -- to knock the stock down $2.375, to $129, in after-hours trading on March 9 from its NYSE 4 p.m. price of $131.375. This is a stock that trades, on average, 20.4 million shares a day on the exchanges.
"The seller of those GE shares overnight received approximately $238 less than if the trade had been done at the 4 p.m. close," Mr. Grasso writes. "The move down $2 3/8 after hours on the 9th appeared to reduce GE's market cap by approximately $7.8 billion," Mr. Grasso writes.
But those examples aren't unusual, Mr. Grasso says. "We hear from listed company executives almost daily, and they are increasingly angry about what they see, and increasingly frustrated as they try to answer questions from their shareholders," he writes.
Two of those companies are EMC and Agilent Technologies. Early in the year, when after-hours trading was still relatively new, EMC heard from "dozens of shareholders through e-mails and phone calls who were concerned" about unusual price action in EMC after hours, an EMC spokesman says.
"We responded and told them there wasn't much we could do but referred them to the New York Stock Exchange and the SEC," he says. "We consider it an issue."
An Agilent Technologies spokesman says: "It has confused investors at times. It may look like our stock is down on the opening when it's really up from the 4 p.m. close."
Some investors are learning their lesson the hard way. "Things can stop on a dime after hours and then they'll drop on you. Just as day trading has become more treacherous, nighttime trading is even more so," says Ray Yamin, a lawyer in Danbury, Conn., who has traded stocks after hours and lost "in the hundreds of dollars" in the choppy action lately.
"We observed an almost $7 move in Agilent stock between 4 p.m. and 5:34 p.m. on March 8 on only 900 shares; a 2 3/8 move in International Business Machines on 100 shares on February 29 and similar occurrences in very widely held stocks like Disney, Honeywell and Home Depot," Mr. Grasso says in the letter.
"This situation is confounding our listed companies, large and small and is confusing investors and undermining their confidence in our markets," he writes. "In addition, small investors are being victimized."
Translation for investors: They may be losing money unnecessarily in after-hours trading, Mr. Grasso says. "I think you can easily understand all the truly unfortunate collateral effects," he says. "The individual transactions do not involve tremendous amounts of money, although people flock to discount and deep-discount brokers to save far smaller sums in commissions. But when the experience of many investors is aggregated, the raw number does become significant," he says.
What worries Mr. Grasso even more, however, is that these anomalous trades after hours may be hurting the market's credibility. "Investors seeking market guidance by looking at how much the price of WMT moved on February 24th, or how much GE moved on March 9th, and how much each moved on the opening the next day, would be materially misled," he says in the letter.
"The apparent volatility in GE was accounted for by a single 100-share trade that occurred outside a fair and orderly market," according to Mr. Grasso.
Meanwhile, the price movers in after-hours trading have grown so significant that day traders lately have begun calling them "crack plays." Says one day trader contacted through a chat room: "They are crack plays because only someone on crack would buy them at those prices."
Write to Susan Pulliam at susan.pulliam@wsj.com1
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