Article on after-hours trading:
February 9, 2000
After-Hours Trading Carries
Sizable Costs for Investors
By RUTH SIMON
Staff Reporter of THE WALL STREET JOURNAL
Investors who trade outside traditional market hours, take note: You may
want to rethink that strategy.
Trading outside the hours of 9:30 a.m. to 4
p.m. has significant costs and few benefits
for retail investors, say Terrence J.
Hendershott and Michael J. Barclay,
professors at the University of Rochester's William E. Simon School of
Business. The pair studied extended-hours trading of Nasdaq Stock
Market and New York Stock Exchange stocks between Jan. 1 and June
30, 1999.
"I don't know why any non-day-traders would want to trade after hours
until this becomes a real market," says Prof. Hendershott. "You only have
to wait until the next morning for a much better market."
Profs. Hendershott and Barclay found that trading outside normal market
hours was nearly twice as costly for investors. According to their research,
the average bid-ask spread for the 250 highest-volume stocks trading on
Nasdaq was 0.48%, or 24 cents on a $50 stock. The spread climbs to
nearly 50 cents for the same $50 stock outside normal market hours.
Greater Volatility
Prices also bounce around more in response to trades outside normal
hours. A small trade of fewer than 1,000 shares typically moved the
stock's price by less than 0.2% during the day, the study found. Outside
normal hours the impact could be twice as great, with the most volatility in
the early morning. "Retail investors would be much better off placing their
orders just after the close rather than getting up at 8 in the morning and
trying to trade then," Prof. Hendershott says.
The spreads may have narrowed somewhat since the period of study,
which was before extended-hours trading was open to individual investors,
and pricing information became more readily available in the fall.
"Volume and liquidity have increased dramatically since July," says Michael
Dunn, a spokesman for Datek Online Holding Corp., which offers trading
from 8 a.m. to 8 p.m. through its Datek Online Brokerage subsidiary.
Statistics suggest that the number of extended-hours trades has increased
since such trading was opened to individuals last summer, although volume
fluctuates from day to day. Datek customers currently make an average of
about 8,000 extended-hours trades a day, up from fewer than 1,000 in the
third quarter of last year, the company says. Wall Street Journal statistics
show that trading volume between 4 p.m. and 6:35 p.m. has averaged
slightly more than 51 million shares daily since Jan. 1, 2000, compared
with about 42 million shares in the fourth quarter of 1999.
Volume Is Small
But even with increased trading volume, "the most liquid stocks are not
very liquid and the selection of stocks is very small," says John Markese,
president of the American Association of Individual Investors. "I would be
hard pressed to be convinced of a reason to trade after hours," says Mr.
Markese, who co-chaired a securities-industry working group that
examined issues related to extended-hours trading.
Brokerage firms have attempted to address the lack of trading volume by
requiring investors to place limit orders, which set a floor or a ceiling on the
price at which the orders will be filled. With a limit order, "the wider the
spread, the less chance of getting an execution," says Michael Satow, vice
chairman of MarketXT.com, one of several alternative exchanges that offer
a longer trading day.
Mr. Satow acknowledges that "there's less-perfect information because
there are fewer participants after hours," which could make it hard for
investors to price their limit orders. But he adds that "this is a brand-new
market, and it will get better as time goes on."
Spreads vary from stock to stock, but a look at two well-known Nasdaq
issues, Oracle Corp. and Yahoo! Inc., shows that disparities exist. The
bid-ask spreads for both stocks in the after-hours market on Monday
were at least double their levels during the regular trading day.
NYSE Spread May Be Wider
The disparities may be even greater for stocks listed on the New York
Stock Exchange, where after-hours volume is smaller. Bid-ask spreads for
a $50 large-cap stock, typically six to 12 cents a share during normal
trading hours, can be 75 cents or more after hours, according to Richard
Wines, senior managing director of Thomson Financial Investor Relations,
a unit of the Thomson Corp.
In some cases, the spread is so great that an investor trading after market
hours through a discount broker could actually save money by placing the
trade with a full-service broker during traditional market hours. Mr. Wines
points to a trade Nov. 22 in which an investor bought 360 shares of H.J.
Heinz Co. in the after-hours market at $42.89 each, up from the 4 p.m.
close of $42. The next morning the stock opened back at $42.
Assuming the investor made the trade through a discount broker and paid
just $15 in commissions, the total cost was $15,455. If the same trade had
been placed through a full-service broker the following morning, the total
cost could have been $15,437 -- or $18 less, assuming a brokerage
commission of $317.
"This kind of situation is not typical, but it certainly happens relatively
frequently," says Mr. Wines, whose firm monitors trading activity for large
companies.
Write to Ruth Simon at ruth.simon@wsj.com
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