Traders Search for the Best Party Amid After-Hours Competition
By Ian McDonald
Staff Reporter
Sep 23, 1999
After-hours trading is a bit like a bad party: There are a lot of lulls, and later on, everyone thinks they could have had a better time elsewhere.
For an example, look no further than Monday night's trading in Bed Bath & Beyond (Nasdaq:BBBY - news) on two rival electronic communications networks, MarketXT and Datek's Island.
Following a late-day announcement by Standard and Poor's that the stock would replace BankBoston (NYSE:BKB - news) in the S&P 500 index, the retailer was the most active issue on MarketXT that night. When the dust settled, the stock last traded at 31. But on rival Island, Bed Bath & Beyond was not among the 10 most active stocks, and the last trade was 29 9/16 at 6:40 p.m. ET, well before the 8 p.m. close. Tuesday morning, the stock opened at 32 7/16, so buying Monday night on either ECN was a good move.
The more-than-1-point difference means you could have saved almost $1,500 on 1,000 shares via Island's last executed trade, rather than MarketXT's.
If a bargain equals a good time, Island threw the best Bed Bath & Beyond party Monday night. Trouble is, you never know which ECN is going to throw the better party on any given night.
On Tuesday, for example, Apple (Nasdaq:AAPL - news) was the third most active issue on both ECNs, but the computer-maker last traded 1/2 point lower on MarketXT (69 1/2) than on Island (70).
Island boasts more trading volume, and a potentially more robust market, than XT. Its 10 most-active stocks traded a total of 274,000 shares Monday night, compared with 7,525 shares for XT's top 10. But unlike Island, XT has "liquidity providers," otherwise known as market makers, who continuously provide buy and sell orders on a stock, potentially tightening spreads. XT spokeswoman Carolyn Ching says liquidity providers help avoid the volatility that many observers expect in thin trading.
But that didn't help in Bed Bath & Beyond trading Monday night because buyers and sellers were too few and too far apart in price.
Even one of XT's liquidity providers admits the system isn't perfect. "It's not a great situation, but it's a start. Remember this was the case before the consolidated tape linked quotes for the same stock on different exchanges," says Mark Madoff, director of listed trading at Bernard L. Madoff Securities.
Why the large volume gap between the two ECNs? They are very different businesses. Island offers trading of Nasdaq stocks via its online order book to more than 200 broker/dealers and their clients from 8 a.m. to 8 p.m ET. (Its late hours were extended from 5:15 p.m. ET on Sept. 15.) Island's customers include retail investors, daytraders and professional traders.
Market XT, formerly Eclipse Trading, only trades after hours (6 p.m. to 8 p.m. ET) and its customers are retail investors, most of whom have never traded after hours before. Also, XT has agreements with only three broker/dealer firms: Dreyfus, Discover and Salomon Smith Barney. Clients of those firms can trade the 200 most active S&P 500 and Nasdaq issues. With more than 6 million customer accounts, Salomon would appear to offer XT the potential for high volume, but the brokerage will not offer online after-hours trading until late in 1999.
Officials at both ECNs say many of the extended session's woes will be solved by the ECN link-up at year-end, which was announced last week. The agreement would link the order books of eight ECNs, including Reuters' institutional ECN giant Instinet, which will begin providing after-hours trading for E*Trade (Nasdaq:EGRP - news) retail customers later this month. This means investors will be able to see current price quotes on all after-hours exchanges when buying or selling a stock.
Cameron Smith, Island's general counsel, says the link-up will be beneficial for investors, particularly with the inclusion of Instinet. He and others believe that, next to the Nasdaq and the New York Stock Exchange participating in the after-hours market, the link-up could be the best thing to help the extra session mature.
Adds Madoff, "The link-up will clearly benefit everyone. Now to see what the market is on a stock you have to go to Island, XT, Instinet. With the link-up, you'll be able to see it in one place."
Insiders have few tips for after-hours trading before the ECN linkup. Most say you should only start with a stock that's actively traded, where you'll usually find tighter spreads.
"We've got stocks we describe as 'by appointment' names because they don't trade much. You shouldn't try to start there," says Dale Carlson of the Pacific Exchange, which continues to trade 30 minutes after the 4 p.m. ET market close in New York.
Bruce White, a private money manager in Pasadena, Calif., warns investors to be wary of stocks with late-breaking news that can be mispriced in after-hours trading, "There's often an exaggerated response to good or bad news. The whole story usually isn't properly analyzed, digested and correctly priced into the stock until the next day."
White's assessment of the extended session may be the most accurate: "If it ever got efficient, it would be interesting."
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