FRAMINGHAM (03/24/2000) - The New York Stock Exchange Inc. (NYSE), Nasdaq Stock Market Inc. and American Stock Exchange Inc. (AMEX) are the indisputable leaders of the U.S. stock market.
But while these three markets attract the bulk of buyers and sellers, they miss out on some trades because they close promptly at 4 p.m. Eastern time Monday through Friday. Demand to execute stock trades may continue after the major markets close and into the wee hours of the morning. To meet this demand, a number of electronic communications networks (ECN) that accommodate after-hours trading have sprung up.
There are nine ECNs, including New York-based Instinet Corp., The Island ECN Inc. and MarketXT Inc., which serve as private alternative stock markets for institutional investors and brokerages. Individuals can't purchase stock directly through an ECN; purchases must be made through traditional stock brokers that partner with ECNs. Most ECNs take trades in the early morning for before-hours trading, until 8 p.m. Eastern time, and a few offer trades 24 hours a day.
Keeping Pace With the Market
Unlike the major public markets, ECNs offer the advantage of directly matching buyers and sellers, thus eliminating the spread - the per-share fee that market makers and brokers charge for executing trades. Despite avoiding the spread, which can range from 6 to 25 cents per share, the amount investors save by trading through ECNs can be minimal, because buyers and sellers still pay commission-based fees.
"People need to realize that they're still being charged a small percentage of money to trade after hours because [brokers] work on a small commission schedule," says Dan Burke, an analyst at Gomez Advisors Inc. in Lincoln, Massachusetts. "Unless you're a day trader, you have to go through a broker to access an ECN."
The biggest advantages to after-hours trading are that it accommodates traders in regions outside of the Eastern U.S. - especially international investors - and capitalizes on early or late-breaking news from an issuer. Much of that news, say analysts, relates to earnings, partnerships and other material announcements from Silicon Valley technology firms traded on the Nasdaq Stock Market.
"What has given rise to after-hours trading [are] private, retail clients, particularly as relates to Nasdaq stocks and technology stocks on the West Coast," says Raphael Soifer, chairman of financial consulting firm Soifer Consulting LLC in Ridgewood, N.J. After-hours news in "one part of the country or world affects prices, so it concerns everyone else."
Low Volume a Problem
The biggest disadvantage to after-hours trading is lack of volume. Most institutional investors close up shop after the closing bell. Analysts say that until the after-hours market attracts significant volume and meaningful price movements, the majority of investors will continue to make their trades during East Coast hours.
"The real issue with after-hours trading is the shortage of end users - buyers and sellers - relative to what exists during normal market hours," says Soifer.
"The average institutional investor trades in $10 million blocks, but the after-hour market won't accommodate those large blocks, so it's not of interest to them yet."
"It's a chicken-and-the-egg conundrum," adds Larry Tabb, an analyst at TowerGroup in Needham, Mass. "There are not enough participants in the aftermarket to justify the expense of having [traders and brokers] working after the market closes, and there isn't enough volume generated to attract the big investors."
Hurdles to Overcome
Because of low trading volume or lack of liquidity, it takes much longer to find buyers and sellers in the after-hours market.
"The ECN market is fragmented. During the day, all transactions [are] run into a central exchange like NYSE, Nasdaq or AMEX," explains Tabb. "In the after-hours market, they are not. Bids outstanding on one ECN don't see each other because the aftermarkets are not connected."
Both NYSE and the National Association of Securities Dealers Inc. (NASD), the parent organization of Nasdaq and AMEX, plan to go public by year's end. Along with the cash bounty that an initial public offering will undoubtedly yield, there will also be pressure to better meet the demands of investors in the form of expanded trading hours.
Nasdaq now accepts quotes from its market makers until 6:15 p.m. Eastern time under a pilot program. "So far, things have been rather insignificant," says NASD spokesman Wayne Lee. Later this year, the Washington-based company plans to explore extending its trading hours further.
However, "there's still a lot of things that need to be worked out," contends Jennifer Schmidt, an analyst at Meridien Research Inc. in Newton, Massachusetts. "Longer hours helps in the U.S., but not for overseas traders.
If the market is extended for a few hours, I'm not sure how much that gives someone in Japan time to conduct trades."
"NYSE and NASD will do after-hours trading, it's just a question of when," says Jaime Punishill, an analyst at Forrester Research Inc. in Cambridge, Mass.
"They have a lot of projects before them right now, like decimalization, and technologically, they're all behind the online trading firms. After-hours trading will not be that simple to execute, but they can't afford to wait."
Definition
After-hours trading refers to the purchase and sale of publicly traded stocks after the major stock markets, such as the New York Stock Exchange, Nasdaq Stock Market and American Stock Exchange, close at 4 p.m. Eastern time. A slew of alternative private markets, called electronic communications networks, have emerged to accommodate after-hours stock trading. They are generally open until 8 p.m. Eastern time during the business week, but some stay open 24 hours a day.