Copyright 2000 The New York Times Company
The New York Times
February 13, 2000, Sunday, Late Edition - Final
SECTION: Section 3; Page 1; Column 1; Money and Business/Financial Desk
LENGTH: 3054 words
HEADLINE: Wall Street After Dark; Extended Hours Hold Promise for Markets, Pitfalls for Investors
BYLINE: By DAVID BARBOZA
BODY:
A FEW weeks ago, I took the plunge into the after-hours stock market, trying to buy 100 shares of the Superior National Insurance Group.
I wasn't exactly interested in finding good companies in which to invest -- and I knew little about Superior National, which just happened to be one of the Nasdaq's most active stocks the evening I sat down at my computer to trade. I simply wanted to participate in the new craze of buying and selling stocks after the closing bell sounds on Wall Street. I wanted to see if someone with little or no experience could trade successfully in the after-hours market.
I also thought it might be fun trading around dinner time with someone else's money.
It wasn't. After a few weeks of after-hours trading, with $5,000 generously supplied by this newspaper, my clicking and ordering had all the drama of a Senate filibuster. Nothing happened.
My attempt to buy Superior National went nowhere. It was what they call a penny stock, trading at just $4.75 a share, but no one wanted my pennies. At 7:22 p.m., two hours after I first entered a buy order, I received a message from E*Trade saying that my order had been canceled.
A few days later, I tried to buy 100 shares of Pfizer Inc., one of the world's biggest drug companies. I clicked. I waited. I expired -- or at least my order did.
And so went my first foray into the after-hours markets. After having just one of every three trades executed in four days of trading (and making just $45 in profits before commissions and taxes), I have decided that after-hours trading isn't all it's cracked up to be -- at least not yet.
Of course, that is just my opinion. Clearly, big financial companies with access to reams of statistics and surveys are of a different mind. In the last year, some of the nation's largest online brokerage firms, including E*Trade and Charles Schwab, have created after-hours markets, and the New York Stock Exchange and Nasdaq are planning late trading sessions of their own.
The online brokers say that reopening the stock markets to small investors after 4 p.m. Eastern time is the next move in a revolution sweeping Wall Street, toppling the old-boy network and giving the average investor the chance to jump in and out of the market day and night, just as the pros do.
"When we have surveyed our customers, we had 40 percent or closer to 50 percent say if the market was available in the after-hours, they would trade," said Lon Gorman, vice chairman of Schwab, the nation's largest online brokerage firm, with more than 3.3 million online accounts holding total assets of $349 billion.
Maybe so, but those customers are not exactly rushing into the after-hours market. As they say on Wall Street, there's not a whole lot of liquidity after 4 p.m. This month, the total volume in after-hours markets open to retail investors has averaged 46 million shares a day, a mere 2 percent of the average volume on the New York and Nasdaq markets during a regular trading day.
And the trading that does occur is highly fragmented. The after-hours market is, in fact, four separate marketplaces, operated by different brokerage firms. Schwab operates one through Redibook, an electronic communications network it owns in a joint venture with Donaldson, Lufkin & Jenrette and Fidelity Investments. Datek uses its Island E.C.N., which caters to active traders. E*Trade customers like me trade in an after-hours market run by Instinet. MarketXT, headed by a former Instinet executive, offers late trading through Dreyfus, Salomon Smith Barney, Mydiscountbroker.com and Morgan Stanley Dean Witter Online. (The Chicago Stock Exchange operates an after-hours market, too, but mainly for institutional investors; retail investors can reach it only through certain brokerage firms, not online.)
Many experts agree that the after-hours markets will blossom into a formidable trading forum, as the major exchanges extend their hours and as the glitches that sometimes confound e-commerce, like last week's hacker attacks, are overcome. But for now, some financial advisers are warning against jumping in.
"If you don't need to trade in the after-hours market, don't," said John Markese, president of the American Association of Individual Investors in Chicago. "The market is thin and very volatile. If you trade through an E.C.N., you may not get a good price. There are still cul-de-sacs out there."
And the streets aren't marked very clearly. Some after-hours markets trade only Nasdaq stocks, others just the best-known names from both the Nasdaq and the Big Board. Some employ electronic order-matching systems, others red-blooded human market makers. Even the hours in question vary; some markets are open from 4 to 6 p.m., others from 4 to 8 p.m.
The Securities and Exchange Commission is concerned. It says it favors investor choice, but its regulators -- who continue to study the after-hours markets -- want investors to be informed about the risks, including the dangers of volatile price swings.
Small Universe, Big Plans
Just how small a market are you in when you trade online after 4 p.m.? Last Tuesday, the volume in Schwab's Redibook market was 2.9 million shares. (During the day, Schwab trades an average of 330 million shares.) Also on Tuesday, there were 8.7 million shares traded on the Island E.C.N., while just 156,000 shares traded on MarketXT.
Bernard L. Madoff, the president of Madoff Securities, said he was working with MarketXT to spur activity in its after-hours market. The Madoff firm is a big Nasdaq market maker, meaning that its business is to foster trading in specific stocks.
Mr. Madoff typically has eight traders buying and selling with investors like me from 4 to 8 p.m. Monday through Friday. But not many retail investors are showing up in MarketXT's virtual trading room, and he is not surprised.
"The whole idea of after-hours trading is designed for a limited universe," he said, referring to investors comfortable in a tougher, more sophisticated market. "Some people were surprised by the small volumes, but we weren't. Clearly it is not a liquid marketplace."
That, however, hasn't stopped just about every major online brokerage firm from announcing plans to offer after-hours trading. The firms are expecting that trading volumes will eventually soar and that all the various market arenas will be linked.
Richard A. Grasso, chairman of the New York Stock Exchange, talks in lofty terms about a time not far in the future when a global stock marketplace will operate around the clock. The world is "equifying," he says, meaning that a global "we" are all dying to trade stocks. And it appears that we are. More than 477 billion shares were traded last year on the Big Board and Nasdaq, almost triple the 174 billion in 1995.
"The product is global now," Mr. Grasso said. "It's going to trade like gold or oil trade. We are not there yet. No. But we will experiment with extended-hours trading." Both the New York Stock Exchange and Nasdaq are studying when and how to offer it.
Douglas M. Atkin, chief executive of Instinet, a division of the Reuters Group, said the evolution would start with stocks like AT&T and Microsoft that are the most widely held and traded, then broaden.
Instinet, the pioneer in after-hours trading for large institutions, now trades about 40 million shares from 4 p.m. to 9:30 a.m. the next day, although one of the busiest days in the trade-matching market it has operated after-hours for E*Trade was all of 1.6 million shares.
Mr. Atkin and others say that if supermarkets can stay open around the clock, why not stock markets? "The studies we've done suggest over three-fourths of U.S. trading decisions are made after hours," Mr. Atkin said. "Isn't it laughable that 1 p.m. is 'after hours' in California?"
Market-Moving Volatility
The after-hours markets are plagued by the inefficiencies of any thin, fragmented marketplace. The problems are mainly liquidity -- that is, maintaining a pool of investors interested in trading -- and pricing.
Until there are enough buyers and sellers, prices are bound to be volatile, most experts say. Investors like me will have trouble getting the best price, or any price, on a trade. And the wisest investors -- institutions, or professional day traders with sophisticated software and access to all the many markets and their prices -- will be able to outfox the less sophisticated.
"This is another symptom of the lack of liquidity," said Craig Pirrong, a finance professor at Washington University in St. Louis. "There's less competition because fewer people are competing in the after-hours market, so the uninformed investor is more likely to get picked off."
Yet the activity of a handful of buyers and sellers exchanging a handful of shares is having a big impact in the established, daytime market. If a stock's price moves sharply after hours, a new benchmark is set for the stock's opening the next morning. And some Wall Street executives say the wrong tone can be set.
"If you look at the difference between how a price closes here and what it opens at, it's significant," Mr. Grasso said of extended-hour trading.
He described trading that took place after hours one day in December in General Electric shares. "We saw a $5 billion market cap swing because of a few hundred shares," Mr. Grasso said. "That's not indicative of the true public market and it instills a false sense of the value in the eye of the public, and that's wrong."
Others, however, say the new markets are just making after-hours trading more democratic. Investors are getting access to pricing that once was available only to the big guys -- institutional traders who could buy up shares late at night or early in the morning, reacting to news ahead of the average Joes.
"The proof is in the pudding," said Edward J. Nicoll, chief executive of Datek Online in Edison, N.J. Datek offers trading before the market opens, from 8 to 9:30 a.m., and after it closes, from 4 to 8 p.m., accounting for about 8 percent of the overall volume on its Island E.C.N.
Mr. Nicoll pointed to the trading last Dec. 7 in Digital Island, a networking provider, as an example of small investors' getting an edge long reserved for the institutions.
"Digital Island was huge," Mr. Nicoll said in an interview the next day. "There was a Reuters story at 7:14 p.m. last night: Sun and Inktomi said they would invest in Digital. The stock closed at 69, ran to 79 last night. This morning it was at 90 on Island E.C.N. . It opened on Nasdaq at 101; now it's 121. Everyone who bought in the after-hours market was smart; everyone who sold was stupid."
Is this the promise of after-hours trading? Not really, say Michael J. Barclay and Terrence Hendershott, who teach finance at the University of Rochester. The two studied after-hours trading over six months last year, just before the doors were opened to smaller investors, and they concluded that there was little reason for guys like me to jump into the market.
In after-hours trading, they said, share prices were more volatile (they rose and fell more sharply on thinner volume) and the cost of trading those shares was higher. The study found that the differences between bid and asked prices were almost twice as wide as spreads during the day, and, as a result, investors were paying larger sums to buy or sell stocks.
"We see substantial problems and few benefits in the after-hours market," Mr. Barclay said.
Day Traders Make the Leap
Day traders love the after-hours market. With their powerful software and real-time access to stock price quotations, they can jump in and out of stocks, especially highflying Internet issues, cashing in quickly when a stock soars after hours.
But day traders are the kind of people who go bungee-jumping. They were pioneers in online trading. They founded firms like Datek. And the best of them know how to navigate electronic communications networks and how to go head to head with professional market makers. Their experience may not be very instructive for the rest of us -- aside from the lessons it teaches about ill-conceived trades in the after-hours market.
There have been countless stories about day traders who make it big and day traders who lose their shirts. Kirk Kazazian is one of those who has made it big. He is 24 and has been day trading for three years, ever since he graduated from the University of Pennsylvania. His take in 1999? A cool $5.3 million after commissions.
Times have never been so good, he said. He works 9 a.m. to 5:30 p.m., trading before the opening bell and after the close, trying to ride the winners after others have hung up their trading spurs.
"These stocks get really hot, say when CNBC mentions them at 4:15," Mr. Kazazian said. "I got in a stock the other day. The stock was mentioned on CNBC at $12 and then it moved to $20 by the end of the day."
The advantage for day traders is speed, according to Mr. Kazazian. They have multiple computer screens and multiple sources of prices and news. He sits in a room with about 100 other day traders at Tradescape.com Inc., one of the nation's largest day trading firms, based in New York. (Last week, Tradescape announced plans to buy MarketXT for $100 million in stock, a deal that will drive its day traders' transactions to MarketXT's marketplace.)
"We're successful here because we have a high-speed connection and we can get in and out before anyone else," Mr. Kazazian explained. "We have direct connectivity to nine E.C.N.'s. People at home may see something and be too slow. People at home are not as well trained."
In other words, buyer (or seller) beware, because to some degree market makers and day traders can use their information edge to arbitrage. They can execute fast trades with smaller investors on one market when they see a stock that looks ready to zoom higher, then sell the same stock at a higher price in a different market.
E*Trade and most of the other brokerage firms offering after-hours trading make an effort to protect investors by requiring them to use limit orders -- orders that set a price at which the investor is willing to make a trade -- rather than letting them simply buy and sell at the market price.
But limit orders are not foolproof. Unsure where a stock is trading after hours, an online investor may place a limit order at a price that is far out of line with reality -- offering to sell too cheaply, for instance, or to buy too dear. Bam! A day trader nails the order, matching the investor's ill-considered price.
On some of the after-hours trading systems, like MarketXT, the investor can see the last sale during the day, the most recent sale in the evening and a long list of bids and offers. Other brokerage firms, like E*Trade, have decided to display just one bid and one asked price. That means that prices at which other investors may be willing to trade cannot be seen. The policy makes it difficult for the little investor to be smart.
An Investor's Tale
Richard J. Koppel, a lawyer in San Clemente, Calif., has tried to be one of the smart guys. But what he told me about his after-hours experience was largely unprintable. Mr. Koppel had the same problem I did late last year: He couldn't get his trades executed. He called E*Trade's investor hot line and became even more confused.
Several of his orders expired, even though they seemed to match up perfectly with other investors' offers to buy or sell the same stock.
"They told me after-hours was very difficult," Mr. Koppel said of his calls to the E*Trade customer service department. "I've tried on three or four occasions. I haven't been able to get an order through. I'm not a real experienced investor, but I know something."
One night last December, Mr. Koppel was trading shares in Tyco International, the conglomerate whose stock had been hammered because of questions about the company's accounting practices.
He checked the bid and asked prices -- the bid is the price at which someone is willing to buy a stock, and the asked is the price at which someone is willing to sell -- and put in an offer to sell 200 shares at a price better than the posted asked price. He said it wasn't displayed, even though E*Trade says it always displays the best price. He called the E*Trade hot line -- and, he said, was told that the best price was not always displayed in after-hours trading. Finally, his price appeared. When it disappeared, he figured his shares had been snapped up. No. After trading ended, a message informed him his order had expired.
That was more than a month ago. Mr. Koppel said he has not traded after-hours since: "I haven't even tried."
Officials at E*Trade acknowledge that there are some problems with the firm's after-hours offering, but they say the system is still in the early stages and is evolving. The company also says customer education should improve results. Soon, they say, new pricing information will be added to the site, giving investors clearer information on prices in after-hours trading.
The company also says some investors may be frustrated because limit orders, by their very nature, reduce the chances of getting an order filled.
"There are some issues and we're moving quickly to resolve those," said Patrick DiChiro, a spokesman for E*Trade, which is based in Menlo Park, Calif. "When we launched it, we made it very clear this is a new market with less liquidity. We said, 'Go slow at first.' "
Of course, things could change drastically in the coming months. After-hours volume has climbed substantially since last fall. And the E*Trade system worked much more efficiently for me last week, when I had four of eight trades executed one night and spent just 25 minutes waiting on the customer service line. Once the major stock exchanges offer extended hours and several of the electronic markets are linked -- a step Nasdaq began instituting last week -- the after-hours marketplace should improve further.
For now, however, trading at night is much more difficult than trading during the day. You have to read -- and take to heart -- the disclaimers: the warnings about liquidity, volatility and risk, risk, risk. And you need to be patient, very patient.
I'm not.
nytimes.com
GRAPHIC: Photos: (Photodisc)(pg. 1); Kirk Kazazian, a 24-year-old day trader, earned $5.3 million last year after commissions. He often trades before or after regular market hours. (Richard Lee for The New York Times); Bernard L. Madoff, president of Madoff Securities, says he is not surprised that his firm's after-hours trading operation has attracted relatively few retail investors. After-hours trading, he said, is still a small market. (Ruby Washington/The New York Times); Lon Gorman, vice chairman of Charles Schwab, says that in surveys of the firm's customers, as many as half indicated that they would be interested in after-hours trading -- if they had the opportunity to do so. (Chester Higgins Jr./The New York Times)(pg. 14); Richard Grasso of the Big Board says stocks will someday be traded nonstop and globally, like oil. (Agence France-Presse)(pg. 15)
Chart: "Diary of a Night Trader"
David Barboza, Chicago financial correspondent for the Times, ventured into the after-hours stock market Monday, trading (with the newspaper's money) during the 4:05 to 6:30 p.m. session on E*Trade. Here is an account of his efforts to profit in shares of Paging Network, a wireless messaging company whose shares had risen 61 percent during the day on Internet buzz. (All times are Eastern Standard Time.)
4:10 p.m. Log onto E*Trade. Two different screens list two different prices for PageNet. Confusing.
4:15 p.m. Enter an order to buy 100 shares at $3.28125. . A message says the trade won't go through, because I've entered improper decimals.
4:18 p.m. Dial E*Trade customer hotline after four failed attempts to enter the right decimals. Put on hold.
4:26 p.m. Remember that E*Trade has told me before to exactly match the price at which someone has posted an offer to sell. So I enter an order to buy PageNet for $3.53125, even though that's more than I want to pay. Get another bad decimal message.
4:36 p.m. Enter the buy order at $3.50. It's accepted!
4:39 p.m. While answering a call on my other line, I'm disconnected from E*Trade. I redial and get put back on hold.
5:00 p.m. A customer service representative comes on the line. He says it's better to enter prices in fractions, not decimals, and that I must exactly match a seller's asked price, which means my order at $3.50 won't be filled.
5:30 p.m. Maybe he's right; my offer to buy at $3.50 isn't listed on E*Trade's screen, even though it's better than the $3.43750 bid that's being displayed.
5:32 p.m. My PageNet order is executed. Despite everything, I've just purchased 100 shares at $3.50.
5:39 p.m. TheStreet.com says after-hours speculators love PageNet, so I decide to flip my shares. I post an order to sell at $3.53125.
6:32 p.m. I get a message that my shares sold for $3.5625. Later, I learn that the night's last trade on the Island E.C.N., another after-hours market, was at $3.66. (pg. 1)
Chart: "Looking Behind the Scenes"
For retail investors, the after-hours market is really four different markets -- cyber-bazaars called electronic communications networks to which various online brokers route orders after the regular markets close. Here is an overview:
ELECTRONIC COMMUNICATIONS NETWORK (E.C.N.)
REDIBOOK
ONLINE BROKERS THAT USE NETWORK FOR AFTER-HOURS TRADES: Charles Schwab; Fidelity Investments; DLJDirect; TD Waterhouse Group
DATE STARTED: November 1999
COMMENTS BY DAN BURKE OF GOMEZ ADVISORS, AN E-COMMERCE RESEARCH FIRM: On Schwab's after-hours market: The Goliath. Healthy volume and good strategic partners, but limited access to pricing information.
FOR AFTER-HOURS TRADING ON TUESDAY, FEB. 8: 2,918,000 shares
MARKETXT
ONLINE BROKERS THAT USE NETWORK FOR AFTER-HOURS TRADES: Morgan Stanley Dean Witter; Salomon Smith Barney; Dreyfus Brokerage Services; Cybercorp; Mydiscountbroker.com
DATE STARTED: August 1999
COMMENTS BY DAN BURKE OF GOMEZ ADVISORS, AN E-COMMERCE RESEARCH FIRM: On MarketXT: Limited liquidity and limited stocks available to trade after hours -- just the biggest names - but good access to pricing information.
FOR AFTER-HOURS TRADING ON TUESDAY, FEB. 8: 156,000 shares
ISLAND
ONLINE BROKERS THAT USE NETWORK FOR AFTER-HOURS TRADES: Datek Online
DATE STARTED: June 1999
COMMENTS BY DAN BURKE OF GOMEZ ADVISORS, AN E-COMMERCE RESEARCH FIRM: On Island and Datek: Popular with active investors and known for its fast executions and good pricing information; it trades Nasdaq, but not Big Board stocks.
FOR AFTER-HOURS TRADING ON TUESDAY, FEB. 8: 8,679,000 shares
INSTINET
ONLINE BROKERS THAT USE NETWORK FOR AFTER-HOURS TRADES: E*Trade Group
DATE STARTED: Fall 1999
COMMENTS BY DAN BURKE OF GOMEZ ADVISORS, AN E-COMMERCE RESEARCH FIRM: On E*Trade's after-hours market: Has a good partner in Instinet, but investors have limited access to prices.
FOR AFTER-HOURS TRADING ON TUESDAY, FEB. 8: N.A.
Graphs show the 5 most traded stocks for each group (volume, closing price, and change) and the averaged daily volume of after-hours trading. (Sources: Listed electronic communications networks)(pg. 14)
Chart: "A Guide to After-Hours Trading"
Big online brokerages all offer after-hours trading to their customers. But the fees, conditions -- even the trading hours -- vary.
CHARLES SCHWAB (WWW.SCHWAB.COM)
4:05 p.m. -- 7:00 p.m. E.S.T.
Basic fees*: $29.95 a trade for up to 1,000 shares, 3 cents for each additional share
Conditions: Nasdaq stocks and stocks listed after 1979 on the N.Y.S.E.; Limit orders only; Unfilled orders expire when session ends; Round lots
E*TRADE (WWW.ETRADE.COM)
4:05 p.m. -- 6:30 p.m. E.S.T.
Basic fees*: $19.95 a trade
Conditions: Listed N.Y.S.E. and Nasdaq stocks; Limit orders only; Unfilled orders expire when session ends
TD WATERHOUSE (WWW.WATERHOUSE.COM)
4:30 p.m. -- 7:00 p.m. E.S.T.
Basic fees*: $12 a trade for up to 5,000 shares, 1 cent for each additional share
Conditions: Most Nasdaq stocks; Limit orders only
DATEK ONLINE (WWW.DATEK.COM)
4:00 p.m. -- 8:00 p.m. E.S.T.+
Basic fees*: $9.99 for each trade up to 5,000 shares
Conditions: Nasdaq stocks; Limit orders only
FIDELITY INVESTMENTS (WWW.FIDELITY.COM)
4:30 p.m. - 8:00 p.m. E.S.T.
Basic fees*: $25 a trade for up to 1,000 shares, 2 cents for each additional share
Conditions: Nasdaq stocks and stocks listed after 1979 on the N.Y.S.E.; Trading available online only; Limit orders only; Unfilled orders expire when session ends
(*Other rates may apply for certain customers. See Web sites. +Datek also holds a premarket session from 8 a.m. to 9:30 a.m.)(Sources: Listed companies)(pg. 15) |
