When the New York Stock Exchange and Nasdaq complete their plans to extend trading hours, it won’t change the schedule of Raymond James Financial Services Investment Consultant Jason Ullom one bit. “I’m not going to stay around here until 8 or 9 o’clock taking small orders from people who want to trade after hours,” said Ullom, who works in Cranston.
The U.S. Securities and Exchange Commission is now working with the stock exchange and Nasdaq to study a number of issues that will be brought about when the exchanges begin operating after 4 p.m. Among the issues are: educating investors about the risks of after-hours trading, disclosures about volatility and liquidity, and the impact on small brokerages.
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Ullom, for his part, said he has received “absolutely no interest or commentary” from his clients about after hours trading, saying that he believes online investors, as opposed to those who seek the counsel of an investment advisor, will be more likely to tap into the market at off hours. But he added that those who do jump in initially will be entering a more volatile market than exists during the day.
Since fewer people will be trading, he said, the spread between bid and ask prices will he higher, which leads to less liquidity and more market volatility.
“A lot of people are going to get hit over the head,” he said. “There are going to be many pitfalls.”
To some extent, those who want to buy and sell securities can already do so through Electronic Communications Networks – companies that take orders electronically and match buyers and sellers. Nine ECNs now operate, creating a network that allows transactions to occur.
The largest such ECN is Instinet, which in August announced that it was teaming with E*Trade, an online brokerage based in Menlo Park, Calif., to allow customers to trade until 6:30 p.m. Meanwhile, The Island ECN, a New York company, announced last month that it is now expanding its operating hours to 8 a.m. to 8 p.m. Formerly, it operated between 8 a.m. and 5:15 p.m.
The company has a network of more than 210 retail and institutional brokerages that subscribe to its service. Investors who want to trade in the evening with Island may do so by placing a limit order, in which they specify the maximum price that they are willing to pay for a stock, or the minimum price they are willing to sell a stock for.
“Our growing after-hours market will further encourage after-hours participation and liquidity,” said Island President Matt Andresen in a statement.
One of the reasons the stock exchange and Nasdaq are moving to extend their hours is that alternative trading systems are moving to become exchanges in and of themselves, creating even more competition, said Chad White, a stock broker and certified fund specialist with Barrett & Co., a Providence brokerage company. Indeed, a spokeswoman for Island said that the company is moving in that direction now.
White added that he does not expect much interest in after-hours trading to arise from Barrett clients because most are long-term investors who have no need to buy or sell in the evening. For true investors – those who buy and hold – whether they buy during the day or at night will not matter much. Still, Barrett, like other brokerages, will offer the service anyway.
“Clearly, at some point every firm has to keep pace with the times,” White said. But he added: “Most of our business is going to come during traditional hours.”
One of the concerns brokers express about off-hours trading is that investors will make decisions based on news that is announced after normal trading hours. If they make impulsive decisions, they said, they may end paying higher prices for securities than they could have paid if they had waited until the next day.
“Many times I’ve seen people trade on Instinet and they end up paying a bad price for it (the security),” Ullom said.
That’s why the coming of after hours trading on the major exchanges is significant, experts say. With more investors, liquidity should increase, and volatility should drop. So far, however, neither the stock exchange nor Nasdaq have set definite timetables for when their hours will be extended.
