Trading after the closing bell
pathfinder.com
Friday, August 27, 1999
Trading after the closing bell
After-hours trading is finally here, but is it something the average investor ought to try?
By Borzou Daragahi
As you've no doubt heard or read recently, a handful of online brokers have finally granted small investors access to the world of after-hours trading. But as some of the pioneers who've tried it can attest, the sparse-volume sessions may not be such a bonanza for individual investors.
Though the gates are open, few ordinary investors have rushed in. Datek, which offers subscribers access to the after-hours session of the Island electronics communications network, or ECN, has reported only about 800 late trades a day, with a record 1,400 trades executed on Aug.17, right after Dell reported earnings.
The volatile, low-volume nature of the after-hours sessions makes trading large-cap stocks dangerous and small-cap stocks, well, nearly impossible.
"For many of the stocks in the Russell 2000, there are no bids or offers," said Halbert Uy, a 26-year-old full-time trader in Washington D.C. "For some of the thinner stocks, forget it."
Just about every online brokerage is already offering or has plans to offer after-hours trading in the next few months. "It's not so much consumer demand as it is perception of consumer demand" that's driving the growth of after-hours trading, said Robert Sterling, an analyst at Jupiter Communications. "Nobody wants to be the firm that doesn't offer it."
Earlier this month, Datek launched a 4 p.m.-to-5:15 p.m. Eastern time trading session for Nasdaq stocks, while Discover and Dreyfus recently began using MarketXT to rout orders for 200 of the largest NYSE and Nasdaq stocks from 6 p.m.-to-8 p.m. Eastern time. To prevent investors from buying or selling at extreme prices during the thinly traded after-hours sessions, the online brokers will only allow customers to place limit orders, where you specify a price at which you're willing to buy or sell.
Low trading volume remains the biggest problem for after-hours trading sessions. And even for the big institutional trading that takes place over ECNs like Instinet, most of the action takes place right after the bell. By the time 5:30 p.m. Eastern time rolls around, most of the trading desks of the big institutions have packed up and headed for Westchester, Long Island or New Jersey.
"After the post-close rush, trading volume slows significantly," says Daniel Burke, an analyst at Gomez Advisors. "One of the biggest challenges is to make sure there's enough fair pricing instead of spotty pricing. The more buyers and sellers you have, the more you generate a true market."
And what about the long-held dream of trading on late earnings reports, like the big boys do? If you're smart, you won't bother, said Uy. "You could get burned badly trying to play that game," he said. "It's not the earnings that are important--it's the analyst conference call and the reaction to the conference call."
Uy himself has developed some unorthodox money-making strategies. Every evening after the closing bell, for example, he makes between five and ten trades in the new after-hours market. But rather than trying to take advantage of late earnings reports releases, Uy plays discrepancies in the bid and ask prices of small-cap stocks.
"Volume is very thin," Uy said "A lot of times after the close you see people who just want out at any cost, and you'll get unusually cheap prices. But the more thinly traded ones are the ones you can take advantage of the price inefficiencies."
In other words, Uy doesn't use the after-hours market to make straight-up trades, but to make arbitrage plays on the price irrationalities created by the after-hours markets themselves.
Uy is not alone. In e-mails and message board posts, many online investors said they've used the after-hours markets to make money off of small price discrepances, which suggests the after-hours market may not be the best place for the average investor.
Ed Forrest, an Oklahoma City retiree who trades through Datek, is an example. One day, just after Dell closed at 41 3/8, Forrest put in a buy limit order for Dell at 41, "just for the heck of it." To his surprise, it went through.
Within 17 minutes, he'd turned around and sold it for 41 3/8. "All I'm looking for is a 1/4 or 3/8," said Forrest. "I buy enough shares to make it worthwhile."
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