Investors spurn after-hours stock trading
By Matt Krantz, USA TODAY
When it was launched with much fanfare eight years ago, after-hours trading was supposed to make Wall Street the street that never sleeps. But in bull market or bear, stock trading has remained a 9:30-a.m.-to-4-p.m. affair.
After-hours activity accounts for just 1% of trading, according to the NYSE Group, operator of the popular NYSE Arca electronic communication network (ECN), which facilitates after-hours trading. It's never gotten above 1% since 2003, the furthest back that NYSE has data.
Individuals aren't gravitating to it, either. Just 1% of trades at brokerage Charles Schwab and E-Trade are done after hours and just 2% at TD Ameritrade. "It's a party that didn't attract many attendees," says Sondra Harris, spokeswoman at Schwab.
Considering the potential convenience of after-hours trading, why hasn't it become a key part of investing? Because:
•Inadequate activity. Light trading after hours becomes a self-fulfilling prophesy. Investors are leery of buying or selling if they fear they might not be dealing with a full crowd of trading partners, Harris says.
•Intense competition during the day. With the Nasdaq, NYSE and other ECNs competing to process buy and sell orders during the day, the difference between the price you must pay to buy a stock and the price you can get for selling it has been squeezed to record lows during regular trading, says Douglas Steigerwald, professor at the University of California, Santa Barbara. That removes incentives to trade after hours, he says.
•Complexity. Most brokers require investors to place "limit" orders after hours, the exact price at which they would trade. Often, the prices are not met after hours because of the lack of activity, says TD Ameritrade's Jay Pestrichelli.
•Questionable quotes. Even if a stock jumps or sinks in after-hours trading, that isn't a harbinger of where it will open the next day in regular trading, especially if the after-hours trading volume is light, Steigerwald says.
That's not to say after-hours trading has no value. If conditions are right, large numbers of investors will take advantage of the extended window, usually in the first hour after the official close, especially during earnings season, says Chris Larkin, vice president of active traders at E-Trade.
For instance, after-hours trading of Microsoft last week, after it reported earnings, hit 12.7 million shares, about 20% of its average daily volume. After-hours trading is fanned by traders who use options and short sales to bet against a stock and who scramble to unravel their bets, says Fane Lozman, an independent trader.
That's why after-hours trading remains a narrow slice of the market, he says. "It's for scared money," Lozman says.
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